A B C D E F G H I J L M N O P Q R S T U V W Y Z
A
Accumulation/distribution line – A technical analysis term that was developed by Marc Chaikin. It is a volume-based indicator designed to measure the cumulative flow of money into and out of a security. It is a running total of each period’s money flow volume. Chartists can use this indicator to affirm a security’s underlying trend or anticipate reversals when the indicator diverges from the security price. Also known as the Cumulative Money Flow Line.
Acid test ratio – A conservative measure of how well a company can meet its short-term financial liabilities. Another well-known liquidity measurement is the current ratio. The two are similar, but the acid test ratio provides a more rigorous assessment of a company’s ability to pay its current liabilities by eliminating all but the most liquid of current assets. Most notably, the acid test ration excludes inventory from the calculation which the current ratio does not. Also known as quick ratio.
Adjustable-rate preferred stock – A preferred stock with dividend payments that vary. The stock’s dividend value adjusts to match changes in the benchmark rate. The benchmark typically is the interest rate on treasury securities, but can also be based on mortgage-backed securities. Adjustable rate preferred stocks are considered more stable than standard, fixed-rate preferred stocks because a drop in the common share’s price is offset by a rise in bonds, and vice versa. Also known as floating-rate preferred stock.
Advance-decline index – The total number of advancing and declining security prices in the stock market. This value is calculated in real-time by taking the total of stocks increasing on a trading day less the number of stocks declining on the same day. Technical analysts use the spread as an indicator of market breadth. A positive spread indicates that a trend is or will soon become bullish, while a negative spread shows a bearish trend. The advance-decline index can be charted for any major index, but the New York Stock Exchange is the most popular as its one of the largest U.S. exchanges. Also known as the advance-decline spread.
After-hours trading – Refers to trading that is conducted on electronic market exchanges after regular stock market trading hours have ended. In the United States, after hours trading typically happens between 4:00 p.m. and 6:30 p.m. Eastern Standard Time (EST). After hours trading is usually abbreviated with the acronym AH. One may also engage in pre-market trading which occurs between 8:00 a.m. and 9:30 a.m. EST.
Agency trade – A trade initiated by a broker rather than the client directly. Only brokers managing discretionary accounts may make agency trades because, otherwise, they do not have the authority to execute orders without the client’s explicit authorization.
All-or-none orders – Refers to an order to a broker to buy or sell a security whereby the entire order must be filled or nothing of the order is to be executed. There would never be a partial order made if marked an all-or-none order. Acronym used is AON. To be contrasted with fill-or-kill order, or FOK.
Alpha – Specifically in trading and investing, the mathematical estimate of the return on a security or a portfolio when the return on the market as a whole is zero. Alpha measures the performance generated independent of the market returns as a whole.
American Depository Receipts (ADRs) – Stocks of most foreign companies that trade on U.S. exchanges are traded as ADRs. Each ADR represents one or more shares of a foreign stock and is issued by a U.S. depositary bank. The U.S. banks purchase the actual stocks and issue before they issue the ADRs which cuts down on the amount of administration and transaction costs associated with each foreign trade. If you own an ADR, you have the right to obtain the foreign stock it represents. The price of an ADR corresponds to the price of the foreign stock in its home market, adjusted to the ratio of the ADRs to foreign company shares.
American options – This refers to the style of option. In the U.S. an option can be exercised at any time between the purchase date and the expiration date. In Europe, for example, options can only be exercised on the date of expiration.
American Stock Exchange (AMEX) – A stock exchange is where stocks are listed and traded. The AMEX is the third largest exchange in the U.S. It handles about 10% of the securities traded.
Annual report – All public corporations that issue stocks in their companies must produce an annual report on a yearly basis. It provides a summary of the financial data, company ownership, accounting practices, executive pay, major strategic initiatives, etc., for the previous year. Annual reports measure a corporation’s financial health.
Arbitrage – When a security is simultaneously bought and sold at two different prices in two different markets. One profits from the price difference while, theoretically, there is no risk to such a transaction.
Ask – The best price currently available for a stock. Also called the offer or offer price.
Asset – Anything which has monetary value, such as a security, real estate, liens, claims on debts, rights to trademarks or patents, etc.
Asset allocation – Refers to how one’s investment funds (or assets) are assigned or invested. Typically, investors would not choose to place 100% of their funds in one stock, but would decide to allocate among many different investment vehicles. Within a portfolio, asset allocation implies diversification.
Asset class – Investments that behave similarly to the gyrations of the markets are grouped together into classes. Analysts often speak about stocks or securities as being a class, fixed income or bonds would be another class. Other analysts speak of derivatives, real estate, etc.
At-the-money – Refers to an option contract whereby the price is the same as the strike price. In this situation, the option has no value. An option can also be “in-the-money” or “out-of-the-money”.
B
Balance of payments – A record of monetary transactions between one country and all other countries over a specific time period. In the US, the Balance of Payments is released four times a year by the Bureau of Economic Analysis.
Balance sheet – A company’s financial situation at the end of its financial year. The balance sheet should report a company’s assets, liabilities and net worth.
Bankruptcy – The legal proceedings for a company or individual which/who cannot pay its debts. Bankruptcy can be voluntary or forced by creditors. The goal of a bankruptcy is to equitably distribute the debtor’s assets to legal creditors and to provide the debtor with a fresh start.
Bearish – When the market sentiment expects prices to go down, the market is considered bearish. The opposite is bullish.
Benchmarks – A set point used to gauge performance of a security or group of securities. When financial reporters compare the DOW’s performance against yesterday’s closing, they are using yesterday’s closing as the benchmark. Year-ago data is used as a benchmark for almost all securities. Benchmarks are often made against similar companies as well as against an industry average.
Best effort – When the underwriter of a securities issue commits to selling as much of the offering as possible, but is not responsible if the offering is not fully sold. Comparatively, some offerings require the underwriter to purchase the unsold shares while all-or-none offerings require all shares to be sold or there will be no shares sold.
Best-Efforts Basis – See best effort.
Bid – The price a buyer is willing to pay for a security at that time. In some cases, this is the offer made by an acquiring company during a take-over.
Bid price – See bid.
Blue chip stocks – Stocks in large companies with a long history of stable earnings, good quality, reliability and solid financial performance in good times and bad.
Blue List – Officially the Blue List of Current Municipal Offerings, this daily publication is a newsletter for people interested in the bond market. It lists the new bond issues and provides commentary and analysis on the industry. Originally printed on blue paper, it’s now available on-line.
Bond – A government or corporate issued debt instrument that guarantees payment of principal and interest on or before the fixed maturity rate. Bonds, usually issued for more than 1 year, are negotiable – meaning they can be bought and sold in the secondary market.
Bond fund – A type of mutual fund that primarily invests in bonds. These funds usually pay dividends periodically and can pay realized capital appreciation as bonds in the funds mature.
Bond interest coverage (ratio) – Measures a company’s ability to meet its interest payments on outstanding debt. It’s calculated by looking at earnings before interest and taxes over a year, divided by the amount of interest paid during that year. A low interest coverage ratio is a sign of a large debt burden. Also called interest coverage.
Book value – This term refers to the accounting value of a company, meaning the value of an asset listed on the balance sheet of a company. Typically, it is calculated by taking the cost of an asset and subtracting from it the accumulated depreciation. It also represents the value of a company should it ever be liquidated and divided up among all the shareholders.
Book value per share – The book value divided by the number of outstanding shares of a company. When this value is compared to the market value per share, it can indicate to an investor whether a stock is under- or overpriced.
Bought deal – An IPO situation where the underwriter purchases all the available shares. Underwriters generally only agree to this arrangement when they are sure there will be enough demand to re-sell the entire issue.
Break issue– When stocks quickly begin trading at a level below the IPO offering price. For example, if the offering price of an IPO is $10/share and on trading day shares drop to $8/share, that IPO is broken. Break issues can be caused by a variety of factors such as changing economic conditions, lack of trust in the company’s management or simply lack of demand.
Breakout – When the price of a security moves above its resistance level or drops below its support level, it breaks out. These levels, marking the high and low prices of the security, denote levels where that security has often reached without “breaking” that barrier. Technical analysts use breakouts as a trend to predict that security ‘s future performance.
Bull spread – A strategy with options, used when the investor is feeling bullish about a stock, that is, they expect the price of the underlying security to increase. This strategy can be used with either puts or calls. It involves buying the same security (with the same number of shares and expiration date) at two different prices. For example, in a call option the buyer purchases one call option at a low strike price and a second call option at a higher strike price. If the price rises, the investor makes money.
Bullish – See also long position. A feeling that the market, or a specific security within the market, will rise in value.
Business cycle – The long-term expansion and contraction of the economy. These fluctuations involve times of GDP growth when wealth is created followed by times of decline or stagnation when the economy contracts. Also called the economic cycle and a boom-and-bust cycle.
Buy-and-hold – An investment strategy where an investor buys stocks and holds them for a long period, despite market fluctuations. Data from the past 50 years supports this strategy as the market in general has risen. Additionally, investors who buy and hold reduce their taxes and trading commissions.
C
Call option – A financial contract where the buyer has the right, but not the obligation, to buy a commodity or security (underlying asset) for a set (strike) price by a certain date (expiration date). The buyer makes money when the price of the underlying instrument rises.
Callable bond– A bond that allows the issuer to redeem the instrument before maturity. The issuer will explain when the bond can be redeemed and at what price. The price will usually be above issue (par) price. Callable bonds generally pay high interest rates and they are generally called when market interest rates begin to fall and they can finance their debt at lower rates.
Callable preferred stock – Preferred stock that the issuer may repurchase under certain, stated conditions. When market rates fall, preferred stocks with a guaranteed yield become very expensive for the issuing company. Thus calls are expected when interest rates fall.
Calls – A financial contract where the buyer has the right, but not the obligation, to buy a commodity or security (underlying asset) for a set (strike)price by a certain date (expiration date). The buyer makes money when the price of the underlying instrument rises.
Capital asset pricing model – A model to help investors place value on stocks by looking at the relationship between risk and rate of return. The theory is that expected return on an investment should be the risk free rate plus a risk premium. The model charts risk and return to see if the return premium is worth the risk taken.
Capital gain – A profit from an investment of capital assets such as stocks, bonds and real estate. Unrealized capital gains are on assets that have gained value but which haven’t been sold. In the US capital gains are taxed at a lower rate than income. Opposite of capital loss.
Capital loss – A loss from an investment into capital assets such as stocks, bond and real estate. Opposite of capital gain.
Capital preservation – An investment strategy to (obviously) preserve capital, usually by utilizing low-risk securities. Over time this low risk strategy can succumb to inflation.
Capped index options – This derivative is both an index option and a capped option. An index option uses an index as its underlying security. A capped option carries a “cap price” which automatically triggers a sale when that price is reached. The option may only be exercised at its expiration if cap price is not reached.
CAR – Refers to capital at risk.
Cash flow – The amount of money or cash that freely moves into or out of an account, a business or a project. Some companies may be “asset” rich, but those assets are not necessarily liquid cash. Cash flow intends to measure the liquid cash over a finite period of time. This measurement can be used to calculate the rate of return and/or determine the value of the company, business or project. It is often used, for example , in models that calculate internal rate of return, net present value, whether or not a business has liquidity issues, etc.
Cash flow per share – calculated by dividing a publicly held company’s cash flow by the outstanding shares of common stock. Some analysts believe this is a more accurate barometer of value than reported earnings per share.
Certificate of deposit (CD) – A certificate issued by a bank or Savings and Loan in return for a deposit of cash for a specified amount of time (usually between 3 months and 5 years). The certificate guarantees a certain interest rate. Generally, the longer the term the higher the interest rate. CDs are a low return-low risk investment and those cashed in before maturity are subject to penalties.
Chicago Board Options Exchange (CBOE) – Is the largest options exchange in the US. Established by the Chicago Board of Trade in 1973, CBOE deals in a wide range of options including equity, index and ETFs.
Closed-end fund – A type of mutual fund that restricts the total number of shares it will sell to investors. If the portfolio managers of the mutual fund decide that the fund has grown too large to manage according to the investment mandate, they will close the fund to new investors. Contrast with open-end fund.
Coincident indicators – Economic indicators that reflect the current state of the economy. The four coincident indicators are non-agricultural employment personal income (excluding transfer payments), industrial production and manufacturing and trade sale. See also lagging indicators and leading indicators.
Combinations (as in straddles) – A combination strategy involves taking both a put and call position on the same asset, or straddling the position. Investors straddle when they believe the underlying asset will have a significant price change, but are unsure if the price will go up or down.
Commission – A broker’s fee to handle a trade. Commissions are usually based on the dollar value of the shares, bonds, options or other financial instrument being bought or sold.
Commodity –Goods that are in demand, that are equal with other goods of the same type and that are used to make other products. An ounce of gold is just as valuable whether it’s mined in Indonesia or panned from the Klondike in Alaska. Most commodities are either raw materials (iron, oil) or agricultural products (sugar, pork bellies). However, the category seems to be expanding with cell phone band width and foreign securities appearing on commodity exchanges.
Common stock – Signifies equity ownership in a public company. The two classes of stock are common and preferred. Common stock usually comes with the right to vote on certain matters, including the election of the board of directors. However, it is secondary to preferred stock in dividend payments and in the event of a bankruptcy.
Completion – Bond-guarantees a project will be completed; OIL&Gas-the steps taken after drilling an oil well in order to begin pumping oil; Football-the catching of a pass.
Compounding – Occurs when interest on a security is added to the principal and thus earns future interest exponentially. For example, a $100 investment that earns 10% in year one starts out with $110 in principal in year two. Compounding measures interest on interest as opposed to just simple interest.
Confirmation – A written acknowledgement provided, usually by a broker, that states that a trade has been completed.
Consolidated tapes – The “ticker” tape that reports the most recent price and volume data on exchange listed stocks. The consolidated tapes compile and report data from all US exchanges where a company’s stocks are traded.
Consumer price index – Is a measure of inflation that reports the changes in consumer prices. The Bureau of Labor Statistics (BLS) monitors about 80,000 goods and services across the US each month. This market basket of products includes food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other categories. Also called the cost-of-living index.
Covered (puts/calls) – When an option call is covered, the seller owns the underlying instrument to back the option. If a put option is covered, the buyer is short (does not own) on the underlying option.
Convertible preferred stock – Is a type of preferred stock that can be converted to a specified number of shares of common stock after waiting period. For example, if XYZ company’s convertible preferred stock can be converted after June 30, 2012 to 5 shares of common stock, the owner must determine if that is an equitable transaction. If the current price of those convertible shares are $50 and common shares are trading at $10, there isn’t a profit in converting to common shares. Generally, conversion can occur any time after the conversion date so the preferred shareholder incurs little risk in holding the convertible shares for a profitable conversion. Occasionally a company can force conversion, but this requirement would be spelled out in the purchase agreement.
Corporate actions – An event initiated by a publicly traded company that affects shareholders or bondholders. Common corporate actions include stock splits, stock buybacks and change in corporate structure (ie, mergers, spinoffs).
D
Day’s high – The highest price of a security on that day. The day’s high is generally above the closing price. Day traders and technical analysts chart the high and low prices each day as a measure of volatility. Also called daily high.
Day’s low – The lowest price of a security, commodity or bond on that day. Day traders and technical analysts chart the high and low prices each day as a measure of volatility. Also called daily low. Opposite of day’s high.
Day trader – An investor who makes many trades in a day, with a goal of making a small profit on each trade. A day trader often makes 10 or more trades in a day and usually closes all holdings by the end of the day.
Limit Sale – See limit order
Debt to equity ratio (D/E) – A company’s long-term debt divided by shareholder’s equity. A high debt to equity ratio is a signal that a company may have trouble meeting its debts while a low debt to equity ratio can be a sign of a cautious management style. It’s important to note that debt to equity ratio’s can be calculated in different ways and thus the investor needs to know what type of debt and equity are being used in the equation. Additionally, some sectors which require large capital outlays, like manufacturing plants, will have higher D/E than other sectors, like software developers, with little capital outlay.
Deep-in-the-money – An option with a strike price that is either less than half the value of the underlying asset (call) or more than double the value of the underlying asset(put). Since the owner stands to make a large profit in either of these situations, the option is very likely to be exercised.
Default – (1) When a debtor fails to make a payment by its due date (ie, fails to pay back a loan) or has violated a term of a debt contract. (2)Failure to fulfill an exercised futures contract. In a short, the person defaults when they fail to deliver the goods. In a long position, the default occurs when the person fails to pay.
Default risk – The possibility that a bond issuer will not be able to pay interest or repay the principal its investors. Ratings agencies monitor bond offerings and issue credit ratings to track risk. The higher the risk of default, the higher expected interest rate.
Defensive policy – A portfolio strategy to minimize loss of principal. This conservative strategy means using low risk and low return investments.
Defensive stocks – A stock that is usually stable in most economic climates. This group of stocks includes necessities like utilities, food, and oil.
Depreciation – A tax and accounting term for the way for businesses account for the decreasing value of an asset over its life. For example, a $1,000 computer may have a five year life expectancy. A business depreciates that asset at a rate of $200/year.
Deregulation – A lessening of government control over financial markets. Proponents of deregulation believe it can lead to increased efficiency. However, opponents are concerned about increases in fraud and unfair practices when regulations decrease.
Derivative – A financial instrument that derives its value from another asset, called the underlying asset. Futures and options are examples of derivatives. Derivatives are traded on exchanges, including the Chicago Board Options Exchange (CBOE).
Direct Investing Plan (DRIP) – An SEC regulated program that allows investors to buy stock directly from a company without going through a broker, saving commission fees. They also often allow investors to purchase stocks in round dollar amounts, ie $100, and thus partial shares are sold. They are also known as Direct Stock Purchase Plan (DSSP) and are closely allied with Dividend Reinvestment Plans that are also known as DRIPs.
Direct public offering (DPO) – A stock offering directly to investors instead of using underwriters. Similar to an IPO, in the DPO the company sells shares directly to anyone. Small and medium companies take the DPO route to save money or because invest bankers aren’t interested in underwriting the offering.
Discretionary account – A brokerage account where the customer gives a broker the authority to make investment decisions without consulting the account’s owner. Customers can set restrictions on the account and the broker must follow the client’s investment goals.
Discount bond– A bond sold at a price lower than its face value, which will return face value upon maturity. Discount bonds pay no periodic interest. Also known as zero-coupon bonds.
Discount broker/brokerage – Firms that provide few services and charge lower transaction fees than full service firms. Discount brokers often streamline the buy/sell process by using computer programs to match transactions, saving on personnel costs. Additionally, they handle a large volume of orders allowing them to make a profit at a lower cost per transaction.
Discount rate – (1) The interest rate charged to member banks when they take short term loans from the Federal Reserve Bank. Banks often use the discount rate as a benchmark for the consumer loans it makes. If the discount rate increases, the bank will most likely increase loan rates for mortgages, autos and other consumer needs. (2) Can also refer to bonds and other discounted financial instruments. The discount rate reflects the interest earned at face value upon maturity.
Diversification – A strategy to reduce risk by investing in a variety of securities. The goal of diversification is to hold disparate securities that will rise and fall at different times.
Dividend – A payment made by a public corporation to its shareholders. Dividends, paid on a per share basis, are most often paid quarterly. Companies are not required to pay dividends and most start ups, which need money to grow, do not pay dividends.
Dividend payout ratio – The percentage of earnings a company pays to shareholders in dividends. Earnings not paid out in dividends are commonly reinvested in the company to ensure growth. Many investors prefer growth companies because their investments grow as capital gains, resulting in a lower tax rate.
Dividend Reinvestment Plan – A plan provided by some public companies which provides for automatic reinvestment of shareholder dividends in more shares of a company’s stock, often without commissions.
Dividend yield – The amount a company pays in dividends as a percentage of the stock price. For the investor this is similar to the interest earned on the investment for that year. Investors looking for steady cash flow will prefer companies with a high dividend yield.
Dogs of the Dow – This investment strategy involves purchasing the 10 Dow Jones Industrial Average stocks with the highest yield for the year, with annual adjustments. Michael B. O’Higgins proposed this strategy in 1991 and over the past two decades the return has been higher than the DJIA. However, individual yearly returns vary greatly.
Dollar-cost averaging (DCA) – The systematic investment into a particular stock or mutual fund of a fixed dollar amount over a period of time. This lowers the price paid per share since the investor will buy more shares when prices are low and fewer shares when prices are high.
Dow Jones Industrial Average (DJIA) – A stock market index that tracks the daily performance of 30 large U.S. companies and is monitored worldwide as an indicator of economic performance. The Dow, no longer heavy in industrial stocks, uses a price-weighted indexing system, not an average.
Due diligence process – The investigation of a potential investment to verify material facts. In an IPO situation, the investor would confirm that information in the prospectus was factual.
E
Earnings – A corporation’s profit after expenses have been paid. Earnings can be computed and reported in a variety of ways. See also other “earnings” definitions for further clarifications and nuances.
Earnings before interest and taxes (EBIT) – As the term indicates, EBIT measures a company’s profit excluding interest and income tax. Also called operating profit, this measure is an indicator of a company’s ability to make a profit. It allows investors to make better comparisons between companies with different capital (and thus tax) structures.
Earnings before taxes (EBT) – An earnings measure to help investors compare different companies ,EBT reflects profitability while ignoring tax consequences. This particular measure is not employed as often as EBIT.
Earnings per share (EPS) – A company’s net profit divided by the number of outstanding (common) shares. Since the number of outstanding shares fluctuates, companies often use a weighted average in this computation. EPS reports shareholder profitability and is thus a key component of share prices.
Earnings yield – An indicator of returns expressed as a ratio, it allows for easy comparison to other investments, like bonds. The measurement compares the last 12 months of earnings per share to the stock price. It is the inverse of the price to earnings ratio.
Economic indicators – Statistics compiled on economic activity used to judge the financial health of the economy or of specific sectors. Many categories, like unemployment, Consumer Price Index (CPI), retail sales, and Gross Domestic Product (GDP) are reported monthly.
Efficient frontier –A portfolio strategy that uses a slope chart to optimize risk and return. This concept, introduced by Harry Markowitz in 1952, allows investors to see how portfolio combinations at various risk levels perform. Diversification was a key concept that came from this process, since highly diverse portfolios tend to be the most efficient.
Equity – (1) Commonly, the shorthand term for stock market investment; (2) Stock, common or preferred; (3) Brokerage, market value of account less the amount held to secure margin accounts; (4) Futures, market value of account if liquidated at current price; (5) Also called Shareholder’s equity, total assets less total liabilities.
Equity fund – A mutual fund that invests in stocks with the objective to grow through capital gains rather than dividends. Equity funds often focus on specific market sectors like growth funds or large-cap. The advantage of an equity fund is the fund’s diversity.
Equity option – Basically a stock option, the most common derivative. Options provide the right, but not the obligation to buy (call) or sell (put) a stock at a specified price (strike) by a specific date.
Escrow receipt – A bank issued certificate that guarantees that the underlying security in an option contract is on deposit and available if the option is exercised.
European options – A European style option may only be exercised on its expiration date, while an American option may be exercised any time prior to expiration. Since European options are less flexible, they are often less expensive than American options. European options typically trade over-the-counter.
Exchange – A market place to buy or sell securities, bonds, options, futures or commodities. The Nasdaq and New York Stock Exchanges are but two examples.
Exchange clearing members – Members of an exchange who are also members of a clearing house. At the end of a trading day, all transactions are processed by a clearing house where transactions are settled. Firms who are not also clearing members must work with a member firm to settle transactions.
Exchange rate – The current market price for which one currency can be exchanged for another. Many factors, including inflation, state of the economy and interest rates, affect the exchange rate. Also called foreign exchange rate and rate of exchange.
Exchange-traded funds (ETFs) – An investment fund that trades on a stock exchange all day long as if it were a stock. These funds allow an investor the diversity of a mutual fund with the convenience of stocks. ETFs hold assets and usually track an index. For example, Standard and Poor’s Deposit Receipt fund (SPDR), the first ETF, mimics the S&P 500.
Ex-dividend – A security that will not yield the current dividend because it was purchased after the ex-dividend date. Since stock ownership can change every day, a company needs to set a date, known as the record date, to identify owners who will be paid the dividend. Generally, on ex-dividend date, the stock price drops by the dividend amount and then rises until the next ex-dividend date approaches. Ex-dividends are generally reported with an x next to the stock listing.
Expense ratio – The percentage a fund spends on operating expenses, including managerial fee, administrative expenses, advertising and all other fees. The expense ratio is reported on the fund’s prospectus. Mutual funds that are actively managed (often specialized funds) generally have the highest fees while index funds usually carry the lowest fees. These fees bring down the fund’s yield and thus it’s important for investors to look at expense ratios.
Expiration date (options) – The date that an option expires if not exercised. Stock options expire on the Saturday following the third Friday of the expiration month, unless that Friday is a holiday in which case the expiration date is the third Thursday. Clearing houses may automatically exercise any option that is in-the-money unless otherwise requested.
Ex-rights trades – Occasionally, shareholders are granted rights to buy additional shares at a price below the current market price. When these stocks are traded without those rights attached, the stocks are being sold “ex-rights”. Ex-rights shares are worth less than shares with rights.
Extracted commodities – Hard commodities, such as oil or gas, minerals, and rubber are extracted. Comparatively, soft commodities are agricultural products like wheat, chickens, barley.
F
Face value – The nominal value of a stock or bond, but not necessarily its current market value. For stocks, it is often the original price of the stock. In bonds, it is usually the amount due upon maturity.
FIFO – An accounting term for inventory, it means first-in, first-out. When the cost to purchase inventory changes, this can have a big impact on gross profits and thus taxes. Currently most American businesses use last-in, first-out accounting. However, in 2008 the SEC moved toward requiring American companies to use FIFO, which is the International standard.
Fill-or-kill order (FOK) –Refers to an order that a broker must cancel if not filled immediately. Purchasers may buy some or all of the order, but if the entire order is not filled, the broker must cancel it entirely. This type of order typically requires a series of transactions to occur simultaneously. To be contrasted with all-or-none orders, or AON.
Financial planner – A professional , guided by the financial planning process, who helps clients meet their financial goals by offering plans to meet stated objectives. Financial planners specialize in investments, asset allocation, cash flow, risk management, retirement planning, tax planning and estate planning.
Financial statements – Documents designed to report on the financial status of a company. The financial statement should include an income statement, a balance sheet and a cash flow statement. Most publicly traded companies follow GAAP guidelines in preparing their financial statements so that all reporting is on equal footing allowing for better comparisons to other companies.
FINRA – The Financial Industry Regulatory Authority, a private corporation that regulates member exchange markets and brokerage firms. FINRA’s stated mission is to protect America’s investors by making sure the securities industry operates fairly and honestly. Toward that end, FINRA offers regulatory oversight of security firms for the investing public. FINRA also licenses stockbrokers and other financial representatives with, for example, Series 6 and Series 7 licenses.
Fixed assets – An accounting term for assets that cannot easily be converted to cash. Also known as non-current assets, fixed assets include items like land, vehicles, machinery, buildings.
Fixed –income – (1) Any type of non-equity investment that obligates the issuer to make regular, fixed payments. (2) Some investments, such as pensions, annuities, and bonds guarantee a payment that is referred to as fixed-income. (3) A description of retirees that carries the implication that they have little flexibility in their spending because they are living on a fixed income.
Fixed Income Security – Investments with a guaranteed return in the form of fixed periodic payments as well as the return of the principal at maturity. Fixed income securities carry low risk and lower returns than other financial instruments.
Flipping– – A strategy of buying initial public offering shares at the offering price and quickly selling those shares at a profit once they hit the exchange. This can be very profitable when a much-touted company issues stock and the public interest drives up the price once those shares hit the public market. (2) flipping can generally describe any asset that is purchased for a quick resale; the term is very common in the real estate market.
Float – The number of shares that are outstanding and available to trade. If shareholders have bought intending to hold those shares, they decrease the float. Small floats tend to be volatile, since even minor changes in demand can have a large impact on the price.
Full service broker – A stockbroker who can provide a variety of investment services, including stock recommendations, financial advice, market research, tax strategies, order execution and experience. Compare to discount brokers.
Fully diluted EPS – A company’s earnings per share (EPS) if all shares outstanding were entered into the equation. Standard EPS calculations disregard stock option grants, warrants, convertible bonds and preferred stock.
Fund supermarket – A brokerage firm that gives investors access to a wide variety of mutual funds from multiple fund families. Fund supermarkets allow the investor to broaden his portfolio while dealing with just one brokerage and one statement.
Fundamental analysis – Fundamental analysts look at company specific intrinsics to measure its strength. They pore over the company’s financials and operations, looking specifically at financial records, management, assets, prospects, etc. It is considered to be the opposite approach to technical analysis. See also Zolio Library for a more in-depth discussion.
G
Generally Accepted Accounting Principles (GAAP) – The standard accounting guidelines to be followed in preparation of a financial statement. GAAP guidelines, followed by most publicly held corporations, provide the standards, conventions and rules accountants should use. These guidelines are established, administered and updated by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).
Global fund – A pool of investors’ capital that has an investment mandate that is global in nature. Global funds invest in more than one region around the world.
Going public – When a private company issues stock on the open market. This initial public offering (IPO) is used to raise capital for the issuing company, while making shares available to the public for the first time.
Good-till-canceled order (GTC) – An order to buy or sell that stays open until it is filled or cancelled (an open order expires at the end of the trading day). Most exchanges limit GTC’s to 30 or 60 days. See Open Order Good-Til-Cancelled.
Government debt – The amount of money a government owes. Governments borrow money via security or bond issues. Also known as national debt or public debt. Differs from government deficit which refers to the gap between the government’s income and expenditures over a period of time.
Greenshoe – Refers to an IPO situation in which there is a provision that gives underwriters the right to sell additional shares at the original offering price, if that stock is selling above offering price on the open market. This SEC rule, legally named the Over-Allotment Option, was first used by the Green Shoe company.
Gross domestic product (GDP) – The market value of all officially recognized final goods and services produced within a country over a specific time period. GDP equals the total government, consumer and investment spending plus the value of imports and subtracts exports. In the US, GDP is reported quarterly, with the “advance” report issued on the last day of each quarter. It is revised with a preliminary report issued about a month later and final report the following month. GDP is reported in both current dollars and constant dollars. The use of constant dollars negates the impact of inflation. The key data monitored by the financial community is the period to period change in output and consumption.
Gross margin – Whether derived by dividing gross Income by net sales or by revenue less the cost of goods sold, and all divided by the total sale revenue, Gross Margin reports on a company’s profitability at a fundamental level, reporting the percentage of income that remains after subtracting production costs. Also called Gross Profit, this is the money the company uses to pay indirect costs, including distributions to shareholders. When used as a comparison, gross margins should be used against similar companies. A high volume consumer products company will most likely have a lower gross margin than a high end luxury product (think snack food vs. luxury automobile).
Gross spread – The fees that underwriters earn for sponsoring a public offering. IPO spreads can climb above 10%, though they are usually pegged at about 7%.
Growth fund – A fund looking for capital growth over the long-term. This fund will invest in fast growing companies with significant revenue growth. Instead of dividends from the companies within the fund, the expectation is that the companies will increase in value. Growth funds are volatile, with greater valuation swings than many funds.
Growth stock – A share in a company which is growing (in earnings or revenue) faster than its competitors, it’s industry or the overall market. These companies are usually focused on growth and are using capital to expand, not to pay dividends.
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Hedge – A strategy to reduce the risk of one investment by making a second, offsetting investment. A hedge is similar to an insurance policy in that it protects an investor against loss. Hedges may be made in a myriad of financial instruments, generally using either options or futures.
Hedging – See hedge
Holding period return/yield – The return on an investment over the entire period it’s been held. It allows investors to compare the rate of return of several different investments and annualizing the HPR allows for comparison of investments held for different periods of time. Also called the Holding Period Yield (HPY).
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Immediate or cancel orders – An order to buy or sell stock or derivatives that instruct immediate execution at the limit price or above. Investors have only a short time to fill part or all of the order before it is cancelled. It’s different from a fill-or-kill (FOK) order which must be entirely filled or there is no transaction.
Income – For companies, income is the money that remains after expenses have been subtracted, usually referred to as earned income and/or net income. Income gives an indication of a company’s financial health and is often the biggest factor in a stock price.
Income statement – A financial statement that reports a company’s revenues and expenses over a reporting period (usually a quarter or a year). The final figure on an income statement reports the company’s net income, or bottom line.
Income stock – A stock that usually pays high dividends. Typically a blue chip and/or other well established company with stable earnings and operating in a mature industry. The company pays high dividends because there is little need to reinvest in the company. The price of an income stocks is affected by interest rates. When interest rates increase the price of income stocks decreases and vice versa.
Index – A tracking device that reports on the performance of a group of securities. As an example, the S&P500 tracks the stock valuations of 500 companies, and each day (hour, minute) reports the overall performance of those stocks. Indexes can be found for most market sectors (transportation, industrials, large cap) and security types (stocks, bonds). Of primary importance is the index’s ability to benchmark performance. The index reports allow investors to make comparisons to yesterday and 10 years ago as well as comparisons of different companies – whether within or between categories. Index can also refer to a measure of the economy, for example, the cost of living index.
Index option – An option that uses an index fund as its underlying asset. This is another strategy where the investor makes (or loses) money when the underlying asset value changes over time. When exercised, payments for index options are in cash since there is no physical asset. Sometimes called Cashed Settled Option.
Individual Retirement Account (IRA) – A retirement account that allows individuals to earn interest on a tax-deferred basis until withdrawal. This allows people to earn income during their high income years and the interest earned is then taxed at lower rates when withdrawn during their retirement. Additionally, many people can make tax deductible deposits into their IRA (people with employer based pension plans and with certain income levels and filing status are not allowed the tax deduction.) There are penalties for withdrawing IRA funds prior to age 59 ½, and withdrawals must begin by age 70 ½.
Inflation – A general rise in the price of goods and services in an economy over time, measured as an annual percentage increase. Inflation causes currency to lose real value because in times of inflation the dollar loses purchasing power.
Inflation risk – The possibility that cash and securities will be worth less in the future because inflation has caused currency to lose real value, resulting in a loss of purchasing power.
Initial public offering (IPO) – The first sale of stock by a company to the public.
International fund – A fund that invests in companies in multiple countries.
In-the-money – When an option can be exercised at a time where the investor makes money, the result is called In-the-money. This occurs in a call option when the underlying asset is selling for more than the strike price or in put option when the underlying asset is selling for less than the strike price.
Intrinsic value (stock) – The true value of a security, not the market price or book value. Intrinsic value calculations often include evaluations of company management, reputation, patents, etc. which are not easy to quantify. There is no standard formula to evaluate intrinsic value. (2) In options, the spread between strike price and call/put price. If the spread is such that an investor is making $10 per share, that option has an intrinsic value of $10.
Inventory turnover ratio – Measures how many times a company’s inventory is sold over a period of time, often a year. The Inventory turnover ratio provides potential investors with critical detail about how a company is managed. Low turnover indicates slow sales and high inventories. High turnover can be a sign of good sales or of ineffective buying. All scenarios have major impact on a company’s bottom line. Inventory turnover ratio’s should be compared to industry averages.
Investment adviser – A person or firm who advises others on investments in return for a fee. This broad term encompasses the one-man shop on the corner, the bloggers and newsletter editors and the large brokerages and banks. Advisers managing more than $25 million are required to register with the SEC. Smaller advisers generally must register with state regulatory agencies. Advisers are regulated by the Investment Advisers Act of 1940 that states that the adviser has the duty to make reasonable recommendations without outside influences and that the adviser always place client interests ahead of its own. Advisors need specific licensing by FINRA.
Investment banker – A person or company who specializes in issuing and selling securities in the primary (ie IPO) market. Investment bankers also help companies and municipalities raise capital. They are strategic advisors and help with mergers and acquisitions, corporate restructuring and other financial needs. They are responsible for detailed documentation and ensuring that all laws and regulations are followed. Investment bankers do not handle every day banking needs like checking accounts and car loans.
Investment club – A group of people who pool their money and make investments. Members of these clubs often research investments and make suggestions to the club about buying into an area they have researched. Most investment clubs are simple organizations with little formal structure.
Issued (equities) – The total number of shares held by shareholders. This number can be only a part of the number of authorized shares of a company. This number is generally reported in a company’s annual report.
Issuer – A company or government entity which has or will offer securities for sale. The issuer could be a corporation, a governmental entity (foreign or domestic) or an investment trust.
Issuing company – The company which sells a security on the primary market. See Issuer.
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Junk bond – High-yield bonds which carry a high risk of default. These bonds are rated below investment grade because their risk is so great that most brokers won’t buy them.
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Lagging indicators – Refers to statistical measurements of the economy or financial market indicators that change after (as opposed to before or with) the economy or business cycle. As the economy follows a particular pattern or trend, these indicators will “lag” behind the overall economic cycle by approximately six months. Major lagging indicators include the unemployment rate, outstanding business and consumer loans, business spending, business profits, book value of business inventories, unit labor costs, and consumer price index (CPI). The Conference Board also publishes monthly an Index of Lagging Indicators which tracks seven indicators. They are changes in the duration of unemployment, outstanding bank loans, Consumer Price Index, labor costs, ratio of manufacturing and trade inventories to sales, ratio of consumer credit to personal income and the prime rate charged by banks. See also coincident indicators which move with the economy or leading indicators that move ahead of the economy.
Large cap – Refers to publicly traded corporations with large market capitalization. Depending on the source, large cap companies are valued at $5 billion plus. Some sources consider large cap to be above $10 million while still others are super-sizing with a mega cap of $50 billion or more.
Last trade – The price paid for the last share traded before the market officially closes for the day.
Last trading day – The last day of trading on a derivative contract before it expires. It is the day immediately preceding the contract’s expiration date. For example, the last day to trade a contract that expires on December 31 would be December 30.
Lead underwriter – The firm, usually an investment bank, which puts together a public offering to issue securities. The lead underwriter will set the offering price and determine share allocation among the syndicate of underwriters.
Leading indicators – Refers to statistical measurements of the economy or financial market indicators that change before (as opposed to after or with) the economy or business cycle. As the economy follows a particular pattern or trend, these indicators will “lead” ahead of the overall economic cycle by approximately six months. The Conference Board tracks 10 leading indicators and publishes its findings monthly. These 10 indicators include: manufacturing workweek, initial claims for unemployment, manufacturer’s new orders, private housing building permits, stock prices for S&P 500, money supply, interest rate on treasury bonds, and consumer expectations. See also lagging indicators which move with the economy or coincident indicators that move ahead of the economy.
Liabilities – Legally binding debts or obligations that a company incurs during the normal course of business. These liabilities, recorded on the right side of a company’s balance sheet, include accounts payable, taxes, loans, deferred revenue, accrued expenses, wages, etc. Current liabilities are due within one year, long-term liabilities are debts due in more than one year’s time.
Last In, First Out (LIFO) – An accounting method to value inventory. Using this method, goods purchased most recently are sold first. For example if a company has 10 widgets that were purchased for $5 each last year and it buys 10 widgets for $10 each this year, it sells the $10 widgets first. This method lowers gross profits and thus taxes.
Limit order – An order to buy a security at no more than a specific price, or to sell a security at no less than a specific price. Limit orders are used when the trader wishes to control price rather than certainty of execution. A limit order is an order to buy a security at no more than a specific price, or to sell a security at no less than a specific price. Limit orders are used when the trader wishes to control price rather than certainty of execution.
Limited liability – Protects a partner or investor by limiting the amount they can lose…which is his/her investment. The partner/investor is not liable for a company’s outstanding debt. Limited liability companies provide this protection to all owners and partners and include the LLC notation after their names.
Liquidity – Assets which are easily bought or sold without causing a movement in the price and without a price discount. It’s an asset which has ready buyers and sellers at all times. Cash and Certificate of Deposits are highly liquid investments. Liquid stocks usually have little spread between the bid and ask.
Listed (stock) – A stock which trades on an exchange is said to be listed on that exchange. Most exchanges have requirements that companies must meet. Characteristics such at market capitalization, revenue and number of shareholders are usually requirements to participate on an exchange.
Lock-up period – During an IPO, there is a predetermined amount of time (often 90 to 180 days) during which employees and close associates of the company cannot sell shares they have been given. This allows underwriters to keep control of the number of shares on the market and thus maintains a stable price. Also known as a lock out or locked up period. The related lock-in period usually refers to the waiting period that is a condition when employees and close associates are given shares outside an IPO situation.
Long market value (margin account) – The value of securities held (in a long position) in a brokerage account, calculated on prior day’s closing price.
Long position – Being long or having a long position in the stock market refers to an investor who has bought a stock with the expectation that its price will rise. This type of position is also referred to as being “long the market” or bullish. The opposite of a long position is a short position.
Long straddle – A strategy investors use when they expect price volatility in a stock (or other security). The investor buys a call and a put with the exact strike price and expiration. If the underlying asset’s price rises, the investor uses the call option and ignores the put. Vice versa if the price goes down. The price must change enough to pay for both options before the investment is profitable.
Long-term debt – The debt (loans or other obligations) a company or a person owes which comes due in more than one year. This debt, along with its interest rate, is reported on a company’s balance sheet. It’s also called funded debt.
Lump sum – One single payment of the amount due, instead of a series of payments made over time.
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Maintenance margin – When an investor purchases securities on the margin (using a loan to pay for part of the sale), the Federal Reserve’s Regulation T requires a margin account (collateral) to be held through the life of the trade. The maintenance margin is the minimum amount to be held in the margin account. FINRA (Financial Industry Regulatory Association) requires a minimum of 25% of the security’s total market value to be held, and many brokerages require minimums of 30% to 50%.
Margin (securities) – When an investor buys securities with borrowed money, the margin is the collateral. See also maintenance margin. (2) Generally, the difference between two prices, i.e. the margin is the difference between what something costs compared to what it sells for.
Margin account – An account at a brokerage firm that holds collateral for securities bought with borrowed money. See margin and maintenance margin.
Market analysis – A researched opinion that attempts to predict the future of a (securities) market and/or to provide insight into that market. There are broadly two types of market analysis: a) technical analysis uses the company and industry historical performances as well as market trends and chart patterns; b) fundamental analysis looks at a company’s specific characteristics for predictive behavior by poring over the company’s financials and operations, looking specifically at financial records, management, assets, prospects, etc.
Market averages – The measure of performance of a group of stocks. The average can be a simple calculation that takes all prices of all stocks in the index and divided by total number of stocks. Market averages are often weighted by price or market capitalization. Changes in the market average are observed to evaluate trends and the health of companies within that market. Markets which are widely monitored and quoted include the NASDAQ, S&P 500 and the Dow Jones Industrial average.
Market cap – See market capitalization.
Market capitalization – The total market value of a company’s tradable shares. Computed by taking the number of shares outstanding times the share price. The market cap, as it is also known, is a reflection of the public’s valuation of a company. The more investors value a company the higher the stock price thus the higher the market capitalization.
Market indexes – A portfolio designed to represent the stock market or specific groupings of stocks. These indexes are used to evaluate the financial health of the markets they represent as well as to benchmark performance for comparison by other portfolios. The NYSE Index, made up of stocks from over 200 companies, tracks the performance of the New York Stock Exchange while the Dow Jones Industrial Average invests in 30 blue-chip industrial stocks. Investors buy index funds to participate in a market, often with less risk than buying shares in a single company.
Market maker – Usually a bank or brokerage that stands ready with a firm, public, ask and bid price for a given security. These companies sell from or buy for their own accounts and hope to make money from the spread. Market makers help maintain liquidity and efficiency in their markets.
Market order – An order to a broker to execute a trade at current pricing. Since these are the simplest orders and are easy to execute, they often carry the lowest commission rate. The danger of a market order is that there is no guarantee that it will be carried out at the rate you expect. There is a lag time between placing your order and having it executed, which may mean a significant price difference.
Market risk – The possibility that a portfolio will lose value over time due to economic changes. Significant economic changes as well as political events and natural disasters all contribute to market risk. Diversification provides some protection against market risk.
Market sentiment – The mood of the market. Financial markets are thoroughly monitored and analyzed using many criteria. As investors review this data they develop a sense of how prices are moving. When most of the market believes prices will be climbing, the market is said to have a bullish mood. But it becomes bearish when investors expect prices to decrease.
Market timing – An investment strategy that uses technical analysis and fundamental analysis to predict future price movements. Since stock prices do not necessarily move in a rational manner, many investors believe this is a risky philosophy.
Maturity – The date on which a bond is due. Most bonds are bought at a discount and the issuer owes the investor the face value upon maturity. For example, if the U.S. Government issues a-one year bond on June 30, it must repay the purchaser on June 30 of the following year.
Mid-Cap – A mutual fund that invests in companies with a market capitalization in the middle range; currently refers to companies capitalized between 2 billion and 10 billion dollars.
Monetary policy – In the U.S., the Federal Reserve Board controls the money supply, thus setting the monetary policy. Primary monetary policy goals are usually controlling interest rates, stable currency and low unemployment.
Money market fund – An open-ended mutual fund investing only in money markets such a U.S. Treasury bills, commercial paper and certificate of deposits. Money funds can only invest in short term (less than one year) debt securities. Money market funds try to maintain a stable net asset value, usually $1.00. These funds are considered very safe investments.
Moneyness – A measure of whether an option will be profitable when exercised. The common forms of moneyness include, “in the money”, “out of the money” and “at the money”. An “in the money” option means that the underlying investment is selling for more than the option’s strike price, resulting in a profit if shares are sold as soon as the options are exercised. The investor will lose money at “out of the money” when the underlying asset costs less than strike price; breakeven would be at “at the money”.
Moving average (MA) – A rolling average used to smooth out volatile numbers, it cuts through data chatter and concentrates on real movement. The moving average takes daily data over a specific period of time to create an average. For example, using a 10-day timeframe the first MA reported will cover data for days 1-10, the next average will be for days 2-11, then 3-12 and so on. The moving average always adds the most recent day and drops the oldest day.
MSCI World Index – comprised of large-cap and mid-cap stocks from 24 developed markets worldwide, this stock market index is a common benchmark for global stock performance. Some detractors claim that it is a benchmark for developed markets worldwide and ignores emerging and frontier markets.
Municipal debt – Bonds issued by a local or state government, municipal bonds are generally sold to fund a specific project like a road, school or sewer. Most, though not all, municipal bonds are exempt from federal income tax and income tax in the state where they are issued. Also known as “munis”.
Mutual fund – An investment vehicle composed of a pool of funds from many investors in order to purchase securities. Funds must have stated goals and objectives which are reported in their prospectus. Funds are generally focused on one security type such as stocks or bonds. They also tend to focus on one market segment like Large Caps or Municipal Bonds. Shareholders are fund owners and are free to sell their shares at any time, at market pricing.
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Naked (options) – When an investor buys or sells an option, but does not own the underlying asset, the option is considered naked or uncovered. Naked options are high risk instruments offering the possibility of huge profits if the price of the underlying asset moves in the direction anticipated. Since the risk is so high, brokerage firms may limit the number of naked options or require them to be written in a margin account.
National Association of Securities Dealers Automated Quotations System (NASDAQ) – An American stock exchange that (as of 2011) has the largest trading volume of any electronic stock exchange in the world. The Nasdaq grew out of the 1938 Maloney Act that created the National Association of Securities Dealers. In 1971, the world’s first electronic stock market-National Association of Securities Dealers Automated Quotations began trading. That acronym is no longer in use and the name of the exchange is simply Nasdaq.
Net asset value (NAV) – Measure of a fund’s (usually a mutual fund) assets minus its liabilities, divided by shares issued. Since this is a per share valuation, it allows investors to compare fund performance to market or industry benchmarks.
Net income – Refers to a number that is derived by subtracting all costs from total income for a specified period. Net income is a very precise accounting concept that is sometimes called net profit or bottom line (because it appears on the bottom line of an income statement.)
Net profit margin – This measure of profitability is calculated by dividing net income by net sales. It shows the amount per dollar of sale a company keeps as income. This allows an investor to compare companies in the same industry to see who is controlling costs. It also allows investors to compare profitability in different industries.
Net profit ratio – See net profit margin.
Net Sales – Equals gross sales minus cash discounts, product returns and other product losses such as damaged and stolen products. It refers to the amount of revenue a company expects to make. Also known as just “sales” in financial statements.
Net worth – Refers to a person’s or a company’s net assets minus total liabilities. A corporation’s net worth is the retained earnings, minus all its short- and long-term debt. Its net worth is reported in the corporation’s 10-K filing and annual report. Also known as shareholders’ equity.
New York Stock Exchange (NYSE) – A large American stock exchange located at 11 Wall Street in Manhattan. It is the world’s largest exchange in terms of market capitalization of its listed companies which are both American and international companies. Stocks, bonds and other securities are traded at the 22 horseshoe shaped trading posts on the exchange floor in an “open outcry” auction environment. Sales are also made electronically, with traders using Hand Held Computers (HHC) on the floor.
New York Stock Exchange Composite index –An index made up of all common stocks listed on the NYSE, including American Depositary Receipts, Real Estate Investment Trusts, and tracking stocks. This index, containing over 2,000 listings, uses a free-float market capitalization weighting. It provides indices on four sectors: industrials, transportation, utilities, and financials.
Non-cumulative – A type of preferred stock that does not require a company to pay back dividends to the shareholder. Preferred shares which are cumulative require companies to pay missed dividends at a future date, but the non-cumulative preferred share owners have no right to dividends that were not paid by the company.
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Odd lot – Stock shares that are sold in bundles or “lots” that are not divisible by 100. Shares are normally sold in 100 share units, called round lots. Thus, any holding not meeting that 100 share criteria is considered odd.
Offering price – (1) The price of shares when stocks are first issued. It may also be called the public offering price. (2) The lowest price a seller will accept for a security.
Open – An order to buy or sell which has not yet been filled or is pending. This is typically the case because the price set by the purchaser or seller has not been met. Orders stay open until buy requirements are met, until it is cancelled or until the end of the trading day. See Open order GTC for orders that may stay open over a longer time frame. (2) The start of a business day on an exchange, allowing commerce to begin.
Open order Good-‘til-cancelled (GTC) – An order to buy that is pending, and that may stay open past the end of the trading day until transaction is completed or the order is cancelled. Most exchanges limit GTC’s to 30 or 60 days.
Open-end fund – A mutual fund that had no limit on the number of shares it will sell to investors. As demand for the fund increases, the fund continues to issue new shares. The fund also purchases back shares without restrictions. Most mutual funds are open ended. Contrast with closed-end fund.
Opening price – The price a security trades at when an exchange opens. Due to aftermarket trading and external factors, the opening price is often different from the previous day’s closing price.
Operating costs – Day to day costs of running an operation. Generally, an operating expense is any cost that is not directly related to producing or manufacturing a good or service. This includes items such as management, administration, sales, professional services, etc.
Operating income – Money a company has earned, less operating expenses and depreciation. Sometimes called operating profit.
Operating margin – A ratio that speaks to a company’s operating efficiency. It considers the revenue remaining once variable costs of production have been paid. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Also known as operating profit margin and net profit margin.
Optional Cash Purchase (OCP) – In some dividend reinvestment plans, investors are allowed to purchase additional shares of stock for cash above the shares that are issued through the plan. Most plans limit the number of shares that may be purchased.
Options – A contract that gives the holder the “option” to buy or sell a stock for a specific price (strike price) at a future date. The holder of the option is not obligated to exercise it. Options are considered derivatives. See also puts and calls.
Options Clearing Corporation (OCC) – The world’s largest derivatives clearing house. It is the issuer and guarantor of all options it lists, matching buyers to sellers and conducting the transaction of sale. It is co-owned by and operates on American Stock Exchange, the Boston Stock Exchange, the CBOE, International Securities Exchange, NYSE Arca, and the Philadelphia Stock Exchange.
Order – An investor’s instruction to buy or sell a stock or other security, usually made to a broker.
Over-The-Counter Bulletin Board (OTCBB) – An electronic trading service offered by the NASD that shows real-time quotes, last-sale prices and volume information for OTC securities. There are no listing requirements as on the large exchanges, but companies are required to file current financial statements to trade on the OTCBB. OTCBB stocks have low market capitalizations and little liquidity which means a larger bid-ask spread. Because of this, these stocks are considered very risky.
Over-The-Counter Market (OTC) – Refers to any stock transaction that does not occur on one of the formal exchanges but is handled through a network of dealers and brokers instead. Typically the exchanges list market capitalization requirements for a company to be able to trade on an exchange. If a company is too small to meet this bar, they may choose to trade their stock in the OTC market instead. Also called off-exchange trading.
Out-of-the-money (OTM) – An option which has no intrinsic value. An option, either a put or a call, which gives the investor the right to buy or sell something at a price which is not as favorable as what the open market currently offers. If an option is OTM before its expiration date, the investor may wait for price fluctuations that will put it back in the money. If the option expires out of the money, then the option is worthless, and the investor has lost the premium paid.
Outstanding shares – The total number of shares or stocks issued by a corporation. This includes common and restricted shares. Corporations list their outstanding shares under “Capital Stock” in quarterly SEC filings.
Oversold – The term used when the price of a security drops suddenly and sharply to the point that investors believe the price drop is actually below its true value. This can happen when unexpected news hits and causes some kind of overreaction or panic selling.
Overbought – The term used when the demand for a security suddenly and sharply increases the price to the point where investors believe it is too high.
Oversubscribed – When demand for a new issue is greater than the number of shares available for sale, it is oversubscribed. Also known as overbooked.
Over-the-counter market – See OTC Market.
P
Par value – Refers to the stated or face value of an instrument. Refers to the face value of a bond.
Parity – When the price of an option (strike price plus any premium) is equal to the market price of the underlying security, parity (equality) is achieved. For example, if ABC is selling for $12 on the stock exchange and the option price is $10, the option needs a $2 premium to be at parity.
Participating preferred stock – A stock that provides the holder with additional benefits beyond those of common stock holders. These benefits include having a dividend paid out before any common stock dividends, potentially a minimum or higher dividend, as well as a share of proceeds if the company liquidates. Unlike most other preferred stock owners, participating preferred stockholders sometimes have voting rights in the company.
Payout ratio – The percentage of net income a corporation pays out in dividends. Also called a dividend payout ratio.
Penalty bid – When an IPO buyer sells the security too quickly, the issue can assess a penalty on the buyer’s broker. It is intended to keep IPO prices from declining during a sell-off.
Penny stock – Low priced securities, typically below one dollar, of very low market capitalized companies. These stocks are traded on the OTCBB and via pink sheets. Stocks are considered risky since there is little transparency and low liquidity.
Percent change – The relative difference between two quantities. Price variations over time are usually tracked by the percent change.
Pink Sheets – A sales system for over-the-counter (OTC) securities. The data was formerly printed on pink paper, hence the name. Today, that data is available electronically from the National Quotation Bureau. See also penny stock.
Pivot points – Specific mathematical formulas that act as predictive indicators of price movement used by technical analysts.
“Plus Tick” Rule – This was an SEC rule from the 1930s which was eliminated in 2007. It required short sales to be made only on an uptick (where the last trade is higher than the one before it) or on a zero-plus tick (where the last trade is even with the one before it as long as that one was an uptick). The purpose of the rule was to prevent traders from being able to force prices downward by borrowing stock and then selling it. Short sales are now allowed on any price tick. Also known as the uptick rule or the tick-test rule.
Portfolio – The collection of investments held by a person or institution. For example, the S&P 500’s portfolio is made up of stocks from 500 different firms. A person’s portfolio might be made up of only equities, or an equity portfolio. A person might hold a diversified portfolio which would mean a collection of some stocks, some bonds, some mutual funds, some ETFs, etc.
Portfolio analysis – Evaluating all securities in a portfolio to determine how each affects overall performance. The analysis could show such elements such as risks or expected return in the current composition.
Preferred stock – A stock that provides the holder with a specific dividend that is paid out before any common stock dividends are paid.
Premium – Usually, the amount above par value that is paid for a bond. In options, the difference between the cost of the underlying asset and the option is a premium. Other securities use premium to note a price higher than the normal cost.
Premium bond – A bond selling for more than its par value.
Present value (PV) – Current value of a future sum of money. For example a $100 bond which matures in one year has a present value that is less than that future sum. Also known as discounted value.
Previous close – The value of a stock or the stock market at the end of the previous trading session. Comparison to the previous close allows an investor to determine if the stock, or stock market, is gaining of losing value.
Price-based options – An option contract which allows the option’s owner to buy stocks at a predetermined price during a specific time period. The holder is not obligated to buy said stock. Stock options are often given to employees (usually managers) as a form of compensation.
Price-earnings ratio (P/E) – A stock’s market price divided by its earnings per share.
Price-earnings ratio to earning per share growth (PEG) – A measure of the relationship between the price-earnings and earnings growth. A low PEG (less than 1.0) usually indicates the company is undervalued.
Price-earnings relative – This ratio looks at the P/E of a stock compared to the market. It allows investors to evaluate performance of a given stock against performance of a larger market.
Price-to-book ratio (P/B ratio) – This ratio compares a company’s book value to current market price. It is often considered by value investors to understand if a stock is a relative good purchase and/or if a company’s stock is priced low because there might be something amiss with the company’s performance.
Price-to-cash-flow ratio (P/CF) – Compares the market value of a company to its cash flow. Cash flows are not impacted by depreciation rules which vary from one jurisdiction to another. By focusing on cash flow, this ratio allows investors to better evaluate companies in different countries.
Price-to-earnings ratio (P/E) – See price-earnings ratio.
Primary market – Refers to securities being sold or issued for the first time, for example in an IPO. Also known as the new issue market (NIM).
Private company – A company that does not trade its stock on public exchanges. There could be stock in such a company, but it is held and traded privately.
Privatization – The ownership transfer of a public company (governmental or publicly held corporation) to the private sector.
Profit margin – A measure of how much profit a company makes on a sale or on total sales over an amount of time. Usually computed by dividing net income by revenue, or net profits by sales.
Profitability – The act of earning a profit. Often measured by price to earnings ratio.
Profitability ratio – Refers to any of a number of ratios that measures how much cash flow a company produces as a percentage of some measurement over a period of time. One can measure the return on sales, return on equity, or return on investment.
Prospectus – The formal legal document that provides details about an investment offering to the public. This document is required by and filed with the SEC and includes background information to help investors evaluate risk.
Proxy – Authorization to act for another. Can refer both to a person (or group of people) who is authorized to act on behalf of an individual or to the actual written authorization paper. For example, a stockholder may authorize the board of directors of ABC corporation to act as their proxy. Or, a stockholder may submit their written proxy to the board of directors of ABC corporation.
Public company – A company that has issued shares or stocks to the public for purchase. Shares are traded via a stock exchange or on the over-the-counter market. Also referred to as a publicly traded company.
Purchasing power – In margin accounts, the money available to purchase securities, taking into account margin requirements. May also refer to the amount of goods and services a unit of currency can buy as an objective standard of today’s purchases to a time in the past. For example, what would a dollar buy today (what is the purchasing power of a dollar) compared to 20 years ago?
Put option – A contract to sell an underlying asset at a fixed price (strike price) even if that price falls in the future. The seller has the right, but not the obligation, to sell that asset by the expiration date. The buyer has the obligation to buy the asset at strike price if the seller exercises the option. In American options the put can be exercised at any point before expiration. European options provide for small windows at expiration date.
Put/call ratio – An indicator reflecting investor mood. It is a comparison of all the put options and all the call options purchased in a single day.
Puts – See Put option.
Q
Quick ratio – Indicator of a company’s financial strength, the quick ratio measures the company’s ability to meet its short term obligations. See acid-test ratio.
Quiet period – The time between when a company files a registration statement with the SEC until the SEC declares the registration statement “effective.” Also known as waiting period and cooling-off period.
R
Real Estate Investment Trust (REIT) – A corporation or trust into which investors’ pooled capital is used to purchase and manage income property, to invest in mortgage loans, and/or in some other aspect of the real estate market. REITs are traded on major exchanges just like stocks and are thus much more liquid than owning real estate outright. REITs also enable a much broader exposure to real estate than purchasing property directly.
Real rate of return – Rate of return after adjusting for inflation.
Regional fund – A fund that specializes in a specific region of interest. The fund typically concentrates geographically, e.g. broadly as in Western Europe or Emerging Markets, or narrowly as in Ireland or Russia.
Regulation T – Federal Reserve Board rule that governs margin accounts. The regulation covers both the initial margin and maintenance margin that collateralize margin accounts.
Reserve requirements – The amount of funds that a commercial bank must hold in reserve against customer deposits and notes, as required by the Federal Reserve Board. This reserve is to ward against running out of enough cash should large numbers of customers wish to withdrawal cash at the same time. Often this is cash on hand in the bank’s vault and/or deposits made to a central bank.
Retained earnings – the amount left after dividends are paid, plus the money in a company’s capital accounts.
Retirement plans – A plan or the name of the vehicle used to save money to provide income after retirement from the work force. Retirement plans can include company funded pensions or vehicles such as 401k accounts, IRA/Keoghs, Insurance and more. Retirement plans are segmented into “defined benefit” which are plans where the amount of money received each month or year is fixed, and “defined contribution” where the amount paid out upon retirement is not fixed but is a factor of how much money the plan holder has contributed over time, how well the investments have performed, and/or of how much the individual wishes to withdrawal. Retirement plans are subject to special tax treatment upon contribution and withdrawal.
Return – The gain or loss on an investment.
Return on common equity (ROCE) – See also return on equity. This ratio only considers common shareholders in the analysis while leaving all preferred shareholder dividends and equity of the equation. Thus, companies and shareholders can look at returns for just the voting shareholders.
Return on equity (ROE) – Measures the rate of return on all stock owners of a company, or a measure of the net income that a firm is able to earn as a percent of stockholders’ investment. ROE shows how well a company uses investment funds to generate earnings growth. Many analysts consider ROE an (if not the most) important financial ratio applying to stockholders, and the best measure of performance by a firm’s management. Return on equity is calculated by dividing net income after taxes by owners’ equity. ROEs between 15% and 20% are generally considered good. Compare profitability ratio.
Return on investment (ROI) – Takes return, the gain or loss on an investment, and compares with the amount of money invested. A security bought for $10 and sold for $11 has and ROI of 10%.
Revenue – A company’s income over a certain period of time. Income includes all moneys received from any source, including sales of goods and services, interest earned, increased value of the company, etc.
Revenue bond – A municipal bond guaranteed by the project it funds rather than by general revenue. A toll road guaranteed by tolls collected is an example of a revenue bond. These bonds are considered slightly more risky than general obligation bonds and may carry a slightly higher interest rate.
Reverse split – A practice that reduces the number of outstanding shares while elevating the cost per share so that the value of the holding remains the same. For example, before a 1 for 2 split, 100 shares at $10 per share would be worth $1000. After a reverse split, the owner could own only 50 shares of the stock, for example, but those shares would be worth $20; the portfolio would continue to be valued at $1000.
Risk – The probability that an investment’s return will be different than expected. Usually the concern is that the return will be lower than expected.
Risk profile – An evaluation to determine an investor’s comfort with risk.
Risk-free rate of return – A theoretical number for the return on an investment that carries no risk. The return on the three-month Treasury Bill is often cited as the risk free rate.
Roadshow – A presentation on a new security (i.e. IPO) made by the issuer to potential investors.
Rollover IRA – Movement of retirement funds from one pre-tax account into an Individual Retirement Account (IRA). Usually occurs when an employee changes jobs and moves their retirement funds from a company sponsored plan to an individual IRA.
Round lot – 100 shares of stock, or a multiple of 100. 100 shares are considered to be the normal unit.
S
s-1 registration statement – The statement filed with the SEC prior to an IPO. This document should include a complete description of the security as well as the details on the firm’s current financial situation and its officers.
Safety margin – Refers to the difference between the true (intrinsic) value of a stock and its price. In accounting, margin of safety refers to the amount sales can drop before reaching the breakeven point. Also referred to as margin of safety.
Sales fee – A charge or commission due to the seller.
Secondary market – When investors buy previously issued securities, i.e. from another investor, instead of from the issuer of the security. Stock exchanges are secondary markets. Also known as aftermarket.
Sector – A market stratification that groups together companies and investments which share similar characteristics. Traditional sectors include Utilities, Health Care, Transportation, Technology, Natural Resources, etc. Sectors are often subdivided to smaller groups; Energy is a subset of Natural Resources, for example. See also sector fund.
Sector fund – A fund made up of investments that all come from or are related to a single sector. Sector funds are less diverse than general market funds, due to their concentration in a single area. See also sector.
Securities – Financial instruments that represent ownership in a company or fund. Historically the “security” was the physical certificate showing ownership in an investment. Today it refers to what is traded on exchanges and can fall into largely 3 categories: equity securities refer to stocks; debt securities refer to things such as bonds and bank notes; and, derivative contracts refer options, futures, swaps, etc. Securities may also refer to the collateral to guarantee a loan.
Securities Act of 1933 – This law was enacted as a result of the 1929 stock market crash. This act is often referred to as the “truth in securities” law. It requires that any sale of a security be registered, and that companies disclose their financial statements.
Securities Act of 1934 – This act created the Securities and Exchange Commission (SEC) which regulates the secondary trading of securities. The SEC oversees sellers of securities, including stock exchanges.
Securities and Exchange Commission (SEC) – U.S. agency set up to protect investors in the secondary securities market. SEC enforces federal securities laws and regulates the industry. A primary responsibility is to ensure full disclosure in the sale of securities.
Security market line (SML) – Plots the risk vs. return relationship on a graph. The line is used to evaluate an asset’s potential return by graphing the expected rate of return of a security as a function of systematic, non-diversifiable risk, or its beta. In portfolio management, the SML represents a potential investment’s opportunity cost as it relates to the alternative of a risk-free interest rate investment. It is also known as the capital asset pricing model.
Self-service broker – A broker who provides tools that are helpful to investors, such as data, reports, market research, etc., but does not provide investment advice, help with one’s risk profile, or help with compiling of portfolio. Fees are lower than full service brokers.
Series 6 – A test to qualify for a license which allows one to sell mutual funds, variable annuities and insurance premiums. One may not legally sell these products without the license. This 2 hour and 15 minute, 100 question exam is administered by the Financial Industry Regulatory Authority (FINRA).
Series 7 – Qualifies one for a General Securities license which authorizes licensees to sell most major types of securities (excludes commodities, real estate and insurance). One may not legally sell these products without the license. This exam is administered by the Financial Industry Regulatory Authority (FINRA). Also known as the General Securities Representative Exam.
Share dilution – When additional shares of stock are issued, the value of existing stocks are diluted. Usually, shares are added via employee stock options, buyouts/mergers and/or when the price of a stock rises too high. Also referred to as stock dilution.
Shareholder – A person or company who owns shares in a corporation. Also known as a stockholder.
Shareholders’ equity – The value of a company or its net worth when one takes total assets minus total liabilities. Also referred to as share capital or stockholders’ equity.
Sharpe Ratio – A measure of risk adjusted performance developed by Nobel Laureate William F. Sharpe. The ratio is used to determine if a portfolio’s return is from smart management or has an element of excess risk. The ratio measures the excess return (or risk premium) per unit of deviation of a single investment asset or of a trading strategy.
Short margin accounts – Collateral accounts to cover short sales. An investor is allowed to borrow money from the broker in order to invest that money.
Short position – An investor who purchases a stock expecting the future value of it to fall; also known as being bearish or “short the market”. To sell a futures contract is to have a short position in that contract’s asset. See also short sale. The opposite of a short position is a long position.
Short sale – Selling “borrowed” securities which must be bought back and returned to the original owner at a later date. Investors use this strategy to try to profit on securities that are losing value. Typically, an investor believes that the security will be cheaper to buy at a later date since s/he believes the value is falling. The security is, therefore, borrowed and sold at a higher price. Once it falls in price, the security is purchased with the proceeds from the sale and delivered back from where it was borrowed. The spread, minus the cost of borrowing, is the profit. Also known as shorting, going short or short selling.
Shorting against the box – Short selling against oneself. Prior to 1997 this was a tax strategy that could move income to the next tax year. See also short sale.
Short-term trading – A strategy where the term of ownership runs from a few hours to a few months. Short term profits are taxed at a higher rate than long-term (12+ months) profits.
Sinking fund – Companies will establish a sinking fund to set aside money over time. The money is used to repay debt by retiring preferred stock or other securities. Investors typically prefer bonds and the like to be backed by a sinking fund because they reason that there is less risk of the company defaulting on repayment as the money has been accumulated slowly over time.
Small cap – Refers to a stock from a publicly traded company with a “small capitalization”. This means the company has a relatively small total market capitalization or equity value. Depending on the source used, some exchanges have a cut off of $500 million while others consider companies with less than $2 billion.
Socially responsible investing (SRI) – A strategy that seeks to support social good as well as financial return. Examples include investing only in companies that employ eco-friendly production, alternative fuels, recycling, etc.
Speculation – A high-risk investment strategy with the possibility of large profits if the anticipated price moves are in the investor’s favor.
Spiders (SPDR) – An exchange-traded fund (ETF) which tracks the Standard and Poor’s 500 Index (S&P 500). The issuer of the SPDR owns each of the stocks traded on the S&P 500 in approximate ratio to their market capitalization. Typically, each spider represents one tenth of the underlying stock. Shares can be bought, sold, short-sold, traded on margin, and function as if they were stocks. Spiders, as with all ETFs, are a way to diversify a portfolio. Also called Standard & Poor’s Depository Receipts, hence SPDR as an acronym.
Spread – The difference between the current bid and the current ask price for a security. This spread is generally thought to reflect a stocks’ liquidity. A small spread is indicative of high liquidity. In the stock market, spread refers to the difference between the bid and ask prices.
Spread option strategies – A position consisting of the purchase of one option and the sale of another option on the same underlying security with a different exercise price and/or expiration date. The three major spread strategies are; Horizontal or calendar spreads that employ the same underlying security and strike price but different expiration dates. Vertical or money spreads where the underlying asset and expiration dates are the same but the strike price is different. Diagonal spreads use the same underlying asset but different strike prices and expiration dates.
Standard & Poor’s 500 Index (S&P 500) – An index of 500 U.S. mid-cap and large-cap stocks. The index tracks stocks from across the market and choses to include based on sector, company size and liquidity of stock. It is a capitalization-weighted index, meaning that stocks with higher market caps count more when calculating the average. The companies included in the S&P 500 are decided by committee and are updated periodically. Along with the Dow Jones Industrial Average (DJIA), it is considered one of the premier securities indices in the U.S. The index was established in 1957, but for comparison purposes is often extrapolated backwards to the beginning of the 1900’s.
Stated value – A value that management assigns to a stock for accounting purposes. Stated value is unrelated to the market value of a stock.
Stock – Represents a claim to partial ownership of a corporation. It gives the holder of the stock a stake in both the ownership and the profits of the corporation. Also known as equity or a share.
Stock certificate – The legal document that signifies ownership in a corporation. Stock certificates, unique to each owner, include details such as number of shares owned, identification number and date. Paper stock certificates are no longer required in the United States, where electronic registration is taking over.
Stock dividend – A dividend paid in stock instead of cash.
Stock fund – A fund that invests in stocks, rather than other instruments such as bonds or money funds.
Stock option – A contract which allows the option’s owner to buy stocks at a predetermined price during a specific time period. Stock options are often given to employees (usually managers) as a form of compensation.
Stock split – Refers to increasing the total number of stock shares available. Corporations will periodically increase the total number of shares in the company, most commonly to create liquidity or during a merger or sale transaction. . For example, in a common 2-for-1 split, a holder of 100 shares worth $50 each becomes the holder of 200 shares worth $25 each. Market capitalization does not change when there is a split, so share value decreases in proportion to the split. The total holding maintains its $5000 value.
Stockbroker – A licensed professional who buys and sells stocks on behalf of someone else for which s/he receives a commission for conducting the transaction. The required licensing comes from FINRA.
Stockholder – A person or company who owns shares in a corporation. Also known as a shareholder.
Stop order – An instruction from the customer to the broker to buy or sell a security when it hits a specific price. Stop orders force the broker to sell once the specified price is met. Also known as a stop-loss order.
Stop-limit order – An instruction from the customer to the broker that combines the stop order’s trigger with a limit order. A stock may be purchased (or sold) by a broker once the stop price has been reached and then stock may continue to be purchased (or sold) only at the limit price or better. As with all limit orders, the transaction will not occur unless the stop price is reached. Unlike the stop order, which becomes a market order once the stop is reached, the stop-limit order becomes a limit order.
Stop-loss order – See stop order
Straddles – Refers to the hedging strategy where one buys the same number of put options and call options on the same underlying security. It is employed at times of great volatility so that the investor may profit on both upward and downward swings and/or prevent losses regardless of the swings.
In street name – Securities which are held in the brokerage firm’s name rather than in the investor’s name. Records are kept separately at the brokerage firm ensuring that the investor is the rightful owner. This practice facilitates electronic transfers.
Strike price – When referring to options, it is the fixed price at which the owner of a call can purchase or at which the owner of a put can sell. This is an important variable arranged ahead of time between the parties involved in derivative contracts. For example, the option for ABC corporation is 100 shares at $10 per share. When that option is exercised, ABC shares are selling on the market for $15 per share. The trade will take place at the strike price of $10 regardless of the market price. Also known as exercise price.
Super Designated Order Turnaround (SuperDot) – An electronic system, currently no longer in use, that the NYSE used to route market and limit orders to a specialist at the NYSE so they could be executed on the trading floor. SuperDOT was replaced by NYSE’s Super Display Book system in 2009.
Swing trading – When a day trader holds his or her positions overnight rather than liquidating for cash at the end of the trading day.
Syndicate – A group of firms who temporarily join together for a specific project. Banks might form a syndicate to loan a large amount of money on a project while investment bankers may syndicate in order to issue a new security.
T
Technical analysis – A methodology that uses historical statistical measures to predict future performance. This practice uses charts to track performance, trends and patterns.
Ticker – A running report of prices and trading information from various stock exchanges. Tickers report data real-time or with slight delays of 15-20 minutes.
Time spread – A trade where the investor buys two of the same instruments, usually options, with two different expiration dates. The investor profits when the price changes on the underlying asset between the different expiration dates. Also called horizontal spread and calendar spread.
Timeliness – A rating system for stocks, based on earnings and price performance. Stocks are ranked into five strata (1-5 or A to E) with 1 or A being the best.
Total assets – The sum of current and long-term resources which have any value that are owned by a person, company, or other entity.
Total debt to total assets – A ratio that measures the financial risk of a company. It shows how much of the company’s assets have been financed by debt.
Total liabilities – The debt a person, company or entity owes; consists of current liabilities (debt that must be paid within 1 year) and long term liabilities.
Trading range – The spread between the highest and lowest prices a stock or a market has traded at over a specific time period. If a stock goes above or below its trading range, it can be viewed to be having either positive or negative momentum.
Trading strategies – A set of rules to trade by or the type of methodology employed when trading. See also Zolio Textbook.
Trading volume – The number of shares traded during a period of time, usually a day.
Transaction costs – (1) The fee charged by a financial institution to handle a trade, e.g. the broker’s fee when buying or selling a stock.
Transfer agent – Usually a financial institution, the transfer agent is appointed by a company to keep track of all the owners of a company’s stocks or bonds. Transfer agents issue stock certificates and maintain accurate ownership records for the client company.
Treasury – the government department responsible for the revenue of the United States. The treasury department issues securities, collects taxes, manages all government accounts and oversees U.S. banks.
Treasury bill (T-bill) – A short term security issued by the U.S. government, T-bills are discounted at sale with profits realized at maturity. No interest is paid on T-bills. They are generally sold in time frames of 91 days, six months and a year.
Treasury bond (T-bond) – A U.S. government debt obligation that matures between 10 and 30 years. Treasuries are issued by the U.S. government in order to pay for government projects. The money paid out for a Treasury Bond is essentially a loan to the government. As with any loan, repayment of principal is accompanied by a specified interest rate. . T-bonds pay interest twice a year. Considered one of the safest investments since they are backed by the “full faith and credit” of the U.S. Government. Also known as Treasuries.
Treasury Inflation Protected Securities (TIPS) – A U.S. government security where the principal adjusts with inflation. For example, if you hold a $1,000 bond and the Consumer Price Index (CPI) increases 3%, that bond value increases 3% to $1,030. Interest, which is fixed, is paid on the adjusted principal twice a year. Principal can adjust downward during times of deflation. The instrument is viewed as one offering protection against inflation.
Treasury note (T-note) – A U.S. government security which matures between 1 and 10 years. T-notes are considered very safe; interest is paid twice a year.
Turnover rate – The number of times a company’s inventory is sold over a period of time, usually a year. This may also refer to the number of employees a company replaces over a period of time versus the average number of employees.
U
Unemployment rate – The percentage of the work force which is not currently employed.
Uncovered (calls/puts) – Selling (calls) or buying (puts) options without owning the underlying asset. Also known as naked option.
Underlying instrument – A financial instrument that supports a derivative’s value. For example, a stock option’s value is determined by the underlying asset which is the actual stock certificate.
Underwater – When an option costs more than the market price of the underlying asset of the option. For example, if you hold options to buy XYZ stock for $50 a share, but it’s currently selling for $40.00 per share, the options are underwater. Also known as out-of-the-money. May also mean insolvent or unable to meet a financial obligation, especially a margin call.
Underwriter –An entity, usually an investment bank, which has responsibility and the risk of selling new securities. If the underwriter cannot sell all the securities, they may hold some of the securities themselves.
Unit Investment Trusts (UIT) – An SEC registered investment company offering a fixed portfolio of securities (stocks, bonds). They are sold only by prospectus to investors, through brokers. They are not actively managed and have a definite life (usually 1 to 30 years).
V
Valuation – The process of estimating what something (a company, an asset) is worth.
Value line index – A stock index that tracks the median price of 1700 stocks listed on the American Stock Exchange, Nasdaq, New York Stock Exchange and the over-the-counter market as well as regional and Canadian exchanges. Each stock is given an equal weight in the index. It is also called the Value Line Investment Survey® and is maintained by a well-respected, research company of the same name. Companies included in the survey are traded on the NYSE, ASE, NASDAQ, regional and Canadian exchanges and the over-the-counter market
VaR – Value at Risk (VaR) estimates the likelihood of losses based on the statistical analysis of historical price trends and volatilities. It is a ratio tracked both for individual portfolios as well as for portfolios of whole companies or funds. The VaR calculates the overall risk of losses and is an important consideration when firms make trading or hedging decisions.
Venture capital – Capital invested in high-risk start-up companies. The capital may be in the form of loans, usually with high interest rates, or of equity positions in the start-up.
Volatility – A security’s value over time, specifically the statistical measurement of the dispersion of returns for a given security or market index. Volatility quantifies risk; the higher the volatility, the greater the risk. Volatility may also be used when discussing types of markets. If stock market makes large up and down swings, it is considered to be a volatile market.
Volume – The number of shares or contracts traded over a specific amount of time (day, year). Can refer to a single company or an entire market.
W
Warrants – A security issued to give the holder the right (but not the obligation) to buy stock in the issuing company for a certain price over a certain time period. Warrants are issued and guaranteed by companies; the similar options are not guaranteed.
Working capital – The measurement of a company’s day-to-day liquidity by subtracting short-term liabilities from its short-term assets. This includes cash, accounts receivable and payable, inventory, short term debts and other short term accounts. It is a telling picture of the financial health of a company. The more working capital that is available, the less financial strain a company experiences. Also known as “current” position.
World Equity Benchmark Shares (WEBS) – A Morgan Stanley exchange traded fund (ETF) product that tracked various foreign country market indices. Developed in response to S&Ps Depositary Receipts (now SPDR S&P 500’). WEBS were renamed ishares MSCI Series in 2000 as part of Barclays launch of ishares. An organization issuing WEBS owns each of the securities traded on an MSCI country index in approximate ratio to their market capitalization. They can be bought, sold, short-sold, traded on margin, and generally function as if they were stocks. Investors use WEBS as a way to easily diversify their portfolios at relatively low cost.
Y
Yellow Sheets – Daily publication of bid and ask prices for over-the-counter bonds. Published by National Quotation Bureau. Includes information on companies who market those bonds.
Yield – Annual rate of return on an investment. Usually expressed as a percentage.
Yield to maturity – The rate of interest that would be realized on a fixed-interest security, or bond, if it were held until its maturity date. It is also referred to as the Internal Rate of Return (IRR). It is used to compare the expected return of different securities.