11. Glossary

5-Step Investing Formula Online Course Manual

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11Section 11 of 11

Glossary

THE 5-STEP INVESTING FORMULA Glossary

page 2 of 28© 2005 INVESTools Inc. All rights reserved.

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INTRODUCTION

SECTION 1 Getting StartedLogging into the INVESTools Investor Toolbox Support Links Workshop Review Account Information Subscription Renewal Technical Support Contact an Instructor

SECTION 2 Introduction to InvestingTolerance for Risk Setting Goals Asset Allocation Tax Exposure Brokerage FirmsIntroduction to the 5-Step Investing Formula

THE 5-STEP INVESTING FORMULA

SECTION 3 Step 1: Searching for StocksUsing a Prebuilt Search Navigating the List of Stocks

SECTION 4 Step 2: Industry Group AnalysisTop-Down Analysis Big Chart AutoAnalyzing All Stocks in a Group Best & Worst Industries List

SECTION 5 Step 3: Fundamental AnalysisPhase 1 Phase 2 Price Pattern Volatility Zacks Report Market Guide News AutoAnalyzer™

SECTION 6 Step 4: Technical AnalysisTechnical Indicators Moving Averages MACD Stochastics Volume Support & Resistance Buy Signals Money Management Sell Stop Orders How Many Shares to BuySell Signals Insider Trading

SECTION 7 Step 5: Portfolio ManagementCreating a Portfolio Managing Your Portfolio Paper Trading Account

BONUS SECTION

SECTION 8 Bonus TopicsTurboSearch Index Tracking Stocks / Exchange-Traded Funds Dow Jones Industrial Average— The Diamonds (DIA) S&P 500—The Spider (SPY) NASDAQ—The Qs (QQQQ)

SECTION 9 Introduction to OptionsAdvantages/Risks of Options Leverage Call Options Put Options Covered Calls

SECTION 10 AppendixPhase 2 Stock Scoring Form Phase 2 Quick List for Zacks Report and Market Guide Investment Tracking Record

SECTION 11 Glossary

Course Overview

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A

Accrued InterestApplying mainly to convertible securities, interest that has accumulated between the most recent payment and the sale of a bond or other fixed-income security.

AcquisitionWhen one firm buys another firm.

Active AccountRefers to a brokerage account in which many transactions occur. Brokerage firms may charge a fee for an account that does not generate an adequate level of activity.

American Stock Exchange (AMEX)Located in downtown Manhattan, it mostly consists of index options (computer technology index, institutional index, major market index) and shares of small to medium-sized companies.

AnalystAn employee of a brokerage, fund management house, or other financial institution who studies companies and makes buy-and-sell recommendations on stocks of those companies. Most analysts specialize in a specific industry.

Announcement DateThe date on which particular news concerning a given company is announced to the public.

Annual Percentage Rage (APR)The periodic rate times the number of periods in a year. (Example: a 5% quarterly return has an A.P.R. of 20%.)

Ask PriceThis is the lowest price an investor will accept to sell a stock. In other words, this is the quoted offer at which an investor can buy shares of stock; also called the offer price.

AssetAny possession that has value in an exchange.

At-the-MoneyAn option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

Authorized SharesNumber of shares authorized for issuance by a firm’s corporate charter.

B

BasisIn simple terms, your cost of the asset. If you pay $10/share for a stock and $1/share commission, your basis is $11/share.

BearAn investor who believes a stock or the overall market will decline.

BearishRefers to the attitude of an investor as being pessimistic; a pessimistic outlook.




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Bear MarketAny market in which prices exhibit a declining trend for a prolonged period, usually falling by 20% or more.

Bid / Bid PriceThe highest price an investor is willing to pay to buy a security.

Bid-Ask SpreadThe difference between what buyers are willing to pay and what sellers are asking for in terms of price.

Black MondayRefers to October 19, 1987, when the Dow Jones Industrial Average fell 508 points after sharp drops the previous week.

Blue-Chip CompanyUsed in the context of general equities, a large and creditworthy company; a company renowned for the quality and wide acceptance of its products/services, and for its ability to make money and pay dividends.

BondDebt issued for a period of more than one year. When investors buy bonds, they are lending money; the seller of the bond agrees to repay the principal amount of the loan at a specified time.

BreakoutA rise in price of the security above a resistance level (commonly its previous high price) or a drop below a level of support (commonly the former lowest price.) It can be used as a buy or sell indicator.

BrokerAn individual who is paid a commission for executing customer orders; an agent specializing in stocks, bonds, commodities, or options, and must be registered with the exchange where the securities are traded.

BullAn investor who thinks the market will rise.

Bull MarketAny market in which prices are in an upward trend.

BullishRefers to the attitude of an investor as being optimistic; an optimistic outlook.

BuyTo purchase an asset.

Buy-and-HoldA passive investment strategy with no active buying and selling of stocks. A long position.

Buy Limit OrderA conditional trading order that indicates a security may be purchased only at the designated price or lower.

Buy on MarginBorrowing to buy additional shares, using the shares as the collateral.

Buy OrderAn order to a broker to purchase a specific quantity of a security.




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Buy Stop Order An order to buy that is not to be executed until the market price rises to the stop price. Once the security breaks through that price, the order is then treated as a market order.

Buyer’s Market A market in which the supply exceeds the demand, creating lower prices.

C

Calendar SpreadApplying to derivative products, a strategy in which there is a simultaneous purchase and sale of options of the same class at different strike prices, but with the same expiration date.

CallAn option contract that gives the holder the right, but not the obligation, to buy a specified number of shares of the underlying stock at the given strike price on or before the expiration date of the contract.

Called AwayWhen a call or put option is exercised against the stockholder.

CapitalMoney invested in a firm.

Capital GainWhen a stock is sold for a profit, the difference between the net sales price of the securities and their net cost.

Capital LossWhen a stock is sold below cost; the difference between the net cost of a security and the net sales price, if the security is sold at a loss.

Cash CommodityThe actual physical commodity, as distinguished from a futures contract.

Cash FlowRepresents earnings before depreciation, amortization, and non-cash charges; sometimes called cash earnings. This indicates the ability to pay dividends.

CeilingThe highest price, interest rate, or other numerical factor allowable in a financial transaction.

CloseThe period at the end of the trading session; sometimes used to refer to the closing price.

Closing PriceThe price of the last transaction of a particular stock completed during a day’s trading session on an exchange.

Closing QuoteThe last bid and offer prices of a particular stock at the close of a day’s trading session on an exchange.




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CollarAn upper and lower limit on the interest rate on a floating-rate note or an adjustable-rate mortgage.

CollateralAn asset than can be repossessed if a borrower defaults.

Combination StrategyA strategy in which a put and call with the same strike price and expiration are either both bought or both sold.

CommissionThe fee paid to a broker to execute a trade, which is based on the number of shares, bonds, options, and/or their dollar value.

Commission BrokerA broker on the floor of an exchange who acts as the agent for a particular brokerage house buying and selling stocks on a commission basis.

CommodityA fixed physical substance that investors buy or sell, usually via futures contracts.

Common Units or SharesTraditionally, units of ownership that do not give guaranteed payments or dividends to their owners, and are usually limited in their voting power. In return for accepting these restrictions, owners of common units normally receive all growth over the amount paid to preferred unit-holders.

ContractA unit of trading for a financial or commodity future; the actual bilateral agreement between the buyer and seller of a transaction as defined by an exchange.

CoverThe purchase of a contract to offset a previously established short position.

Covered CallA short call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. These generally limit the risk the writer takes because the stock does not have to be bought at the market price if the holder of the option decides to exercise it.

Covered OptionA position offset by an equal and opposite position in the underlying security.

Covered PutA put option position in which the option buyer is also short the corresponding stock or has deposited cash or cash equivalents equal to exercising the option. This limits the buyer’s risk because money or stock is already set aside. In the event the holder of the put option decides to exercise the option, the buyer’s risk is more limited than with an uncovered or naked put option.

D

Daily Price LimitThe level at which many commodity, futures, and options markets are allowed to rise or fall in a day. Exchanges usually impose a daily price limit on each contract.




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Day OrderReferring to general equities, a request to either buy or sell stock that, if not cancelled or executed the day it is placed, expires automatically. All orders are day orders unless otherwise specified.

Day TradingEstablishing and liquidating the same position or positions within one day’s trading.

Delayed QuoteA stock or bond quote that shows the bid and ask prices 15, sometimes 20 minutes after a trade takes place.

Depressed MarketMarket in which supply overwhelms demand, leading to weak and lower prices.

Discount BrokerA brokerage house featuring relatively low commission rates in comparison to a full-service broker.

DiversificationDividing investments among a variety of securities with different risks, rewards, and correlations in order to minimize risk.

DividendA portion of a company’s profit paid to common and preferred shareholders.

Domestic MarketA nation’s internal market for issuing and trading securities of entities domiciled within that nation.

Dow Jones Industrial Average (Dow)The best known U.S. index of stocks. A price-weighted average consisting of 30 actively traded blue-chip stocks, primarily industrial, including stocks traded on the New York Stock Exchange. It is also a barometer of how shares of the largest U.S. companies are performing.

DowntickA downward price movement in a particular stock. A trade occurring at a lower price than the previous sale.

DownturnThe transition point between a rising, expanding economy to a falling, contracting one.

E

Earned IncomeIncome that is paid as a salary from a job or passed through from a schedule C or a partnership that you materially participated in and had the power to contract for. This type of income is subject to employment taxes.

EarningsNet income for a company during a period.

Earnings SurprisesPositive or negative differences from the consensus forecast of earnings by institutions.

Employee Stock FundA firm-sponsored program that enables employees to purchase shares of the firm’s common stock on a preferential basis.




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ExerciseTo implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise PriceThe price at which the security underlying a future or options contract may be bought or sold.

ExpirationThe time an option contract lapses.

Expiration DateThe last day on which an option may be exercised. For stock options, this date is the third Friday of the expiration month.

Extension DateThe day on which the first option either expires or is extended.

F

Financial AdviserA professional who offers financial advice to clients for a fee and/or commission.

Financial AnalysisAn analysis of a company’s financial statement, often done by financial analysts.

Financial AnalystA professional who analyzes financial statements, interviews corporate executives, and attends trade shows of companies in order to write reports recommending either purchasing, selling, or holding various stocks. Also called securities analyst and investment analyst.

Flexible Mutual FundA fund that invests in a variety of securities in varying proportions in order to maximize shareholder returns while maintaining a low level of risk.

FluctuationA price or interest rate change.

ForecastingMaking projections about the future performance of a stock on the basis of historical and current conditions data.

Full-Service BrokerA broker who provides clients an all-inclusive selection of services, such as advice on security selection and financial planning.

Fully InvestedUsed to describe an investor whose assets are totally committed to investments, typically stock.

Fund ManagerThe person responsible for the allocation of pooled money invested in a particular mutual fund. He/she is charged with investing the money to attain the returns and level of risk of the mutual fund investors.




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Fundamental AnalysisSecurity analysis that seeks to detect mis-valued securities through an analysis of a firm’s business prospects, focusing on earnings, dividend prospects, expectations for future interest rates, and risk evaluation of the firm.

FuturesA term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on a commodity exchange.

Futures ContractAn agreement to buy or sell a set number of shares of a specific stock in a designated future month at a price agreed upon today by the buyer and seller. The contract is often traded on the futures market. A futures contract differs from an option as an option is the right to buy or sell, while a futures contract is the promise to actually make a transaction.

Futures OptionAn option on a futures contract.

G

GainA profit on a securities transaction recognized by selling a security for more than the security originally cost. The gain is the difference between the buy price and the sale price.

Gross ProfitSales minus the cost of the goods sold.

Gross Profit MarginThe gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold.

Growth OpportunityOpportunity to invest in profitable projects.

H

HedgeA transaction that reduces the risk of an investment.

HedgingA strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. Its purpose is to reduce the volatility of a portfolio by reducing the risk of loss; it can help lock in profits.

Held OrderAn order that must be executed without hesitation or if the stock can be bought or sold at that price in sufficient quantity.

High-Tech StockStocks of companies operating in high-technology fields.

Hold1) To maintain ownership of a security over a long period of time.2) The recommendation of an analyst who is not positive enough on a stock to recommend a buy, but not negative enough on the stock to recommend a sell.




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I

IRA (Individual Retirement Accounts)Tax deferred accounts individuals can contribute to as long as they have earned income.

In-the-MoneyA put option with a strike price higher than the underlying futures price or a call option with a strike price lower than the underlying futures price.

IndexStatistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes from a base year or from the previous month. Indexes measure the ups and downs of stocks, bonds, and some commodities markets in terms of market prices and weighting of companies in the index.

Index FundInvestment fund designed to match the returns on a stock market index; a mutual fund with a portfolio that matches a broad-based index such as the S&P 500 and a performance mirroring it.

IndicatorUsed in the context of general equities, a technical or fundamental measurement used to forecast the market’s direction, such as investment advisory sentiment, stock trading volume, interest rates direction, and corporate insiders’ buying or selling.

Insider InformationMaterial information about a company that has not yet been made public.

Insider TradingTrading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from buying or selling stock.

InsidersDirectors and senior officers of a corporation; those who have access to inside information about a company; someone who owns more than 10% of the voting shares of a company.

Investment IncomeThe revenue from a portfolio of invested assets.

Investment ManagerThe individual who manages a portfolio of investments; also called a portfolio manager or money manager.

Investment StrategyA strategy an investor uses when deciding how to allocate capital among several options, including stocks, bonds, cash equivalents, commodities, and real estate.

InvestmentsFinancial securities, such as stocks and bonds.

InvestorThe owner of a financial asset; one who is looking to earn money in the stock market through a “buy-and-hold” strategy. Most earnings are either long-term capital gains, dividends, or interest.




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K

Keogh PlanA type of pension account in which taxes are deferred. Available to those who are self-employed.

L

Lapsed OptionAn option that no longer has any value because it was not exercised before or on its expiration date.

Large-Cap StockA stock with a high level of capitalization, usually at least $5 billion market value.

LeaderA stock or group of stocks first to move in a market upsurge or downturn.

LEAPS (Long-term Equity Anticipation Securities)Long-term options.

Leverage The rising or falling at a proportionally greater amount than comparable investments; a given stock price change that may result in a greater increase or decrease in the value of the option.

Limit Order An order to buy stock at or below a specified price, or to sell stock at or above a specified price. A conditional trading order designed to avoid the danger of adverse unexpected price changes.

Listed Stocks Stocks traded on an exchange.

Long Straddle Taking a long position in both a put and a call option.

Long TermIn accounting terms, one year or longer.

Long-term Capital GainsGains from the purchase or sale of capital assets that are held for longer than 12 months.

Long-term InvestorA person who makes investments for a period of at least five years in order to finance his or her long-term goals.

Loss RatioThe ratio of losses paid or accrued by an insurer to premiums collected over a year.

M

Majority ShareholderA shareholder who is part of a group that controls more than half the outstanding shares of a corporation.




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MarginAllows investors to buy securities by borrowing money from a broker; the difference between the market value of a stock and the loan a broker makes.

Margin AccountAn account that can be leveraged, in which stocks can be purchased for a combination of cash and a loan. The loan is collateralized by the stock; if the value of the stock drops sufficiently, the owner must either put in more cash or sell a portion of the stock.

Margin CallA demand for additional funds because of an adverse price movement.

Market AnalysisAn analysis of technical, corporate, and market data used to predict movements in the market.

Market IndexA measure of the market consisting of weighted values of the components that make up a certain list of companies. A tracking of the performance of certain stocks by weighting them according to their prices and the number of outstanding shares using a particular formula.

Market OpeningThe start of formal trading on an exchange.

Market OrderAn order to buy or sell a stated amount of a security at the most advantageous price obtainable after the order is presented in the trading crowd. Special restrictions cannot be specified (all or none or good till cancelled orders) on market orders.

Market PricesThe amount of money a willing buyer pays to acquire stock.

Market ResearchA technical analysis of factors such as volume, price trends, and market breadth that are used to predict price movement.

Market ReturnThe return on the market portfolio.

Market RiskRisk that cannot be diversified away.

Market ShareThe percentage of total industry sales that a particular company controls.

Market Value1) The price at which a security is trading and could presumably be purchased or sold.2) What investors believe a firm is worth, calculated by multiplying the number of shares outstanding by the current market price of a firm’s shares.

MatureTo cease to exist; to expire.




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Merger1) An acquisition in which all assets and liabilities are absorbed by the buyer.2) Any combination of two companies.

MidcapA stock with a capitalization of usually between $1 billion and $5 billion.

MomentumThe amount of acceleration in an economic, price, or volume movement.

Money Market FundA mutual fund that invests only in short-term securities, such as banker’s acceptances, commercial paper, repurchase agreements, and government bills.

Moving AverageThe mean calculated at any time over a past period of fixed length.

Mutual FundPools of money managed by an investment company and regulated by the Investment Company Act of 1940. It offers a variety of goals, depending on the fund and its investment charter. Some funds seek to generate income on a regular basis, others seek to preserve an investor’s money, while others seek to invest in companies growing at a rapid pace.

N

NASDAQThe National Association of Securities Dealers Automatic Quotation System.

Naked Option Strategies An unhedged strategy making exclusive use of the short call strategy and short put strategy.

Naked StrategiesWriting an option without owning the underlying asset. The holder is naked because he/she may have agreed to sell something not owned.

Narrow MarketAn inactive market, which displays large fluctuations in prices due to a low volume of trading.

Narrowing the SpreadReducing the difference between the bid and ask prices of a security.

Nearest MonthThe expiration date of an option or future that is closest to the present.

NetThe gain or loss on a security sale as measured by the selling price of a security less the adjusted cost of acquisition.

New York Stock Exchange (NYSE)The Big Board or the Exchange.




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NYSE Composite IndexComposite index covering price movements of all new world common stocks listed on the New York Stock Exchange. It is based on the close of the market on December 31, 1965, at a level of 50.00, and is weighted according to the number of shares listed for each issue. The composite index is supplemented by separate indexes for four industry groups: industrial, transportation, utility, and finance.

No-Load Mutual FundA mutual fund that does not impose a sales commission; an open-end investment company whose shares are sold without a sales charge.

Notification DateThe day the option is either exercised or expires.

O

Offer PriceIndicates a willingness to sell at a given price.

OpenIn the context of general equities, having either buy or sell interest at the indicated price level and side of a preceding trade.

Open PositionA long or short position whose value will change with a change in prices.

OpeningThe beginning of the trading session officially designated by an exchange during which all transactions are considered made “at the opening.”

Opening PriceThe range of prices at which first bids and offers are made on an exchange.

OptionThe right, but not the obligation, to buy or sell an asset at a set price on or before a given date. An option is part of a class of securities that derive their value from the worth of an underlying investment.

Option AgreementA form an options investor fills out when opening an option account that guarantees the investor will follow trading regulations and has the financial resources to settle possible losses.

Option CycleThe cycle of option expiration months. The most common cycles are: January, April, July, and October (JAJO); February, May, August, and November (FMAN); and March, June, September, and December (MJSD).

Option HolderA person who has an option that has not been exercised.

Option PriceThe price the buyer of the option contract pays for the right to buy or sell a security at a specified price in the future; also called option the premium.




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Option SellerThe party who grants the right to trade a security at a given price in the future; also called an option writer.

Option SeriesA group of options on the same underlying security with the same exercise price and maturity month.

Options ContractA contract that, in exchange for the option price, gives the option buyer the right, but not the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a specified time period or on a specified date (expiration date).

OrderInstruction to a broker/dealer to buy, sell, deliver, or receive securities or commodities that commits the issuer to the terms specified.

Out-of-the-Money Option1) With a call option, when the strike price is greater than the market price of the underlying security, giving you the right to purchase a security at a price higher than the market price, which is not valuable.2) With a put option, when the strike price is lower than the market price of the underlying security.

OverboughtIn the context of general equities, they are too high in price, thus, a technical correction is expected.

P

Paper Gain/LossUnrealized capital gain (loss) on securities held in a portfolio based on a comparison of the current market price to the original cost.

P/E RatioThe price to earnings ratio; current stock price divided by trailing annual earnings per share or expected annual earnings per share.

PeakThe high point at the end of an economic expansion until the start of a contraction.

Pension PlanA fund established for the payment of retirement benefits.

Portfolio InsuranceA strategy using a leveraged portfolio in the underlying stock to create a synthetic put option. The goal is to ensure that the value of the portfolio does not fall below a certain level.

Portfolio ManagerIn the context of general equities, professional responsibility for the securities portfolio of an individual or institutional investor, such as a mutual fund, pension fund, profit-sharing plan, bank trust department, or insurance company. In return for a fee, the manager has the fiduciary responsibility to manage the assets prudently and choose which asset types are most appropriate over time.




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PositionA market commitment; the number of contracts bought or sold for which no offsetting transaction has been entered into. The buyer of a commodity is said to have a long position, and the seller of a commodity is said to have a short position.

Preferred SharesShares that give investors a fixed dividend from the company’s earnings and entitle them to be paid before common shareholders.

Preferred StockA security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on earnings and generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar amount or as a percentage of par value.

Premium1) A bond sold above its par value.2) The price of an option contract. In futures trading, the amount by which the futures price exceeds the price of the spot commodity. For options, the option price in the open market or the portion of the price that exceeds parity.

ProfitRevenue earned minus the cost and commission. The amount gained on a transaction.

Profit ForecastA prediction of future profits of a company that could affect investment decisions.

Profit MarginAn indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by revenue for the same 12-month period. Also known as net profit margin.

Profit-Sharing PlanAn incentive system that allows employees to share in company profits through a cash fund or a deferred plan used to buy stock or bonds.

Profit TakingAction by short-term securities traders to cash in on gains created by a sharp market rise, which pushes prices down temporarily but implies an upward market trend.

Public OfferingIn the context of general equities, an offering to the investment public, after compliance with registration requirements of the SEC, usually by an investment banker or a syndicate made up of several investment bankers, at a price agreed upon between the issuer and the investment bankers.

Public OwnershipThe portion of a company’s stock that is held by the public.

Publicly HeldDescribes a company whose stock is held by the public.

Publicly Traded AssetsAssets that can be traded in a public market, such as the stock market.




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Purchase OrderA written order to buy specified goods at a stipulated price.

PutAn option granting the right to sell the underlying futures contract. This security gives investors the right to sell a fixed number of shares at a fixed price within a given period.

Put-Call RatioThe ratio of the volume of put options traded to the volume of call options traded, which is used as an indicator of investor sentiment (bullish or bearish).

Put PriceThe price at which an asset is sold if a put option is exercised.

Put to SellerTo exercise a put option; to require that the option writer purchase the stock at the strike price.

Q

QuarterlyOccurring every three months.

Quoted PriceThe price at which the last trade of a particular security or commodity took place.

R

Rally (Recovery)An upward movement of prices.

RangeThe high and low prices or high and low bids and offers recorded during a specified time.

Real TimeA stock or bond quote in real time; a quote that states a security’s most current offer to buy or sell.

Realized ReturnThe return that is actually earned over a given time period.

RecessionA temporary downturn in economic activity, usually indicated by two consecutive quarters of a falling gross domestic product.

Required ReturnThe minimum expected return needed in order to purchase an asset/to make the investment.

Resistance LevelA price level above which it is supposedly difficult for a security or market to rise. A price ceiling at which technical analysts note persistent selling of a commodity or security.




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ReturnThe change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during that period.

Return on Equity (ROE)An indicator of profitability determined by dividing net income for the past 12 months by common stockholder equity and shown as a percentage. ROE is used to measure how a company is using its money.

Return on Investment (ROI)Book income as a proportion of net book value.

Revenue SharingThe percentage split between the general partner and limited partners of profits and losses resulting from the operation of a business.

RiskThe risk that the issuer cash flow will not be adequate to meet its financial obligations. Additional risk a firm’s stockholder bears when the firm uses debt and equity.

Risk FactorA set of common factors that impact returns (e.g., market return, interest rates, inflation, or industrial production).

Risk IndexesCategories of risk used to calculate fundamentals, including 1) market variability, 2) earnings variability, 3) low valuation, 4) immaturity and smallness, 5) growth orientation, and 6) financial risk.

Risk ManagementThe process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.

Risky AssetAn asset that’s future return is uncertain.

Roth IRAA type of IRA (Individual Retirement Account) that allows contributors to invest up to $2,000 per year, and for assets to grow completely tax free, and to withdraw the principal and earnings tax-free under certain conditions. However, the contributor does not receive an initial tax deduction for making contributions to the IRA.

S

SECSecurities & Exchange Commission, a federal agency that regulates the U.S. financial markets, as well as oversees the securities industry and promotes full disclosure in order to protect the investing public against malpractice in the securities markets.

Sales ForecastA key input to a firm’s financial planning process based on historical experience, statistical analysis, and consideration of various macroeconomic factors.

S&P 500 Composite Index (Standard & Poor’s Corporation)An index of 500 widely held common stocks that measures the general performance of the market.




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Savings BondA government bond issued in face value denominations from $50 - $10,000, with local and state tax-free interest and semiannually adjusted interest rates.

SectorUsed to characterize a group of securities that are similar with respect to maturity, type, rating, industry, and/or coupon.

SecurityStocks and their derivatives.

Securities MarketsOrganized exchanges plus over-the-counter markets in which securities are traded.

Sell Limit OrderConditional trading order that indicates a security may be sold at the designated price or higher.

Sell OffThe sale of securities under pressure.

Sell OrderAn order that may take many different forms by an investor to a broker to sell a particular stock, bond, option, future, mutual fund, or other holding.

Sell Out1) The liquidation of a margin account after a customer has failed to bring an account to a required level by producing additional equity after a margin call.2) The selling of securities by a broker when a customer fails to pay for them.3) The complete sale of all securities in a new issue.

Seller’s MarketA market in which demand exceeds supply. As a result, the seller can dictate the price and the terms of a sale.

Selling ShortSelling a stock not actually owned. If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually, the investor must buy the stock back on the open market.

Series1) Options: All option contracts of the same class with the same unit of trade, expiration date, and exercise price.2) Stocks: Shares with common characteristics, such as rights to ownership and voting, dividends, or par value.

Share BrokerA discount broker who charges trades per share and reduces the per-unit charge as the number of shares traded increases, as opposed to a dealer who charges a percentage of the dollar amount of the trade.

ShareholderA person or entity that owns shares or equity in a corporation.

SharesCertificates or book entries representing ownership in a corporation or similar entity.




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ShortOne who has sold a contract to establish a market position and has not yet closed out the position through an offsetting purchase.

Short PositionOccurs when a person sells stocks he or she does not yet own. Shares must be borrowed before the sale to make “good delivery” to the buyer. Eventually, the shares must be bought back to close out the transaction. This is done when an investor believes the stock price will drop.

Short SellingEstablishing a market position by selling a security one does not own in anticipation of that security’s price falling.

Short TermAny investments with a maturity of one year or less.

Short-term Gain/LossA profit or loss realized from the sale of securities held for less than a year. This is taxed at normal income tax rates if the net total is positive.

Sideways MarketA horizontal price movement within a narrow price range over an extended period of time, creating the appearance of a relatively straight line on a stock’s price graph.

Single OptionA single put option or call option, as opposed to a spread or straddle, which involves multiple puts and calls.

SlumpA temporary fall in performance, often describing consistently falling security prices for several weeks or months.

SmallcapA stock with a small capitalization, meaning a total equity value of less than $500 million.

Soft MarketA buyer’s market in which supply exceeds demand, causing little trading activity and wide bid-ask spreads.

SPDRs (Spiders)Designed to track the value of the S&P 500 Composite Price Index. They trade on the American Stock Exchange under the symbol SPY. SPDRs are similar to closed-end funds, but are formally known as a unit investment trust. One SPDR unit is valued at approximately one-tenth (1/10) of the value of the S&P 500. Dividends are disbursed quarterly and are based on the accumulated stock dividends held in trust, less any expenses of the trust.

SpeculationPurchasing risky investments that present the possibility of large profits but also pose a higher-than-average possibility of loss. A profitable strategy over the long term if undertaken by professionals who hedge their portfolios to control the amount of risk.

SplitWhen a company splits its outstanding shares into more shares. The investor’s equity in the company remains the same and the share price of the stock owned is one-half the price of the stock on the day prior to the split.




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Split StockThe division of the outstanding shares of a corporation into a large number of shares. Ordinarily, splits must be proposed by directors and approved by shareholders.

Spread1) The gap between bid and ask prices of a stock or other security.2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months; also known as a straddle.3) The difference between the price at which an issue is bought, and the price at which it is sold.

Spread OptionA 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.

Spread OrderAn order listing the series of options the customer wants to buy and sell and the desired spread between the premiums paid and received for the options.

Spread StrategyA strategy involving a position in one or more options so that the cost of buying an option is funded by selling another option in the same underlying; also called spreading.

Stochastic IndexA tool measuring overbought and oversold conditions in a stock over a certain period.

StockOwnership of a corporation indicated by shares, which represent a piece of the corporation’s assets and earnings; a security.

StockbrokerA person registered with the CFTC who is employed by and solicits business for a commission house or futures commission merchant.

Stock BuybackA corporation’s purchase of its own outstanding stock, usually in order to raise the company’s earnings per share.

Stock CertificateA document representing the number of shares of a corporation owned by a shareholder.

Stock DividendThe payment of a corporate dividend in the form of stock rather than cash; often used to conserve cash needed to operate the business. Stock dividends are not taxed until sold.

Stock ExchangesFormal organizations approved and regulated by the SEC that are made up of members who use the facilities to exchange certain common stocks. The two major national stock exchanges are the New York Stock Exchange (NYSE) and the American Stock Exchange (ASE or AMEX).

Stock IndexAn index like the Dow Jones Industrial Average that tracks the performance of a portfolio of stocks.




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Stock Index FutureA security using composite stock indexes to allow investors to speculate on the performance of the entire market or to hedge against losses in long or short positions. The settlement of the contracts is in cash.

Stock Index OptionAn option in which the underlying security is a common stock index.

Stock MarketAlso called the equity market, the market for trading equities.

Stock OptionAn option whose underlying asset is the common stock of a corporation.

Stock Purchase PlanA plan allowing employees of a company to purchase company shares often at a discount, or matching employer funds.

Stock SplitOccurs when a firm issues new shares of stock and in turn lowers the current market price of its stock to a level that is proportionate to pre-split prices.

Stock TickerA letter designation assigned to securities and mutual funds traded on U.S. financial exchanges.

Stop-Limit OrderA stop order designating a price limit. Unlike the stop order, which becomes a market order once the stop is reached, the stop-limit order becomes a limit order.

Stop-Loss OrderAn order to sell a stock when the price falls to a specified level.

Stop Order (Stop-loss)An order to buy or sell at the market when a definite price is reached, either above (on a buy) or below (on a sell) the price that prevailed when the order was given.

StoppedThe guarantee of a specific price on the customer’s working order while the dealer tries to obtain a better one.

Stopped OutA purchase or sale executed under a stop order at the stop price specified by the customer.

StraddleThe purchase or sale of an equal number of puts and calls with the same terms at the same time.

StrangleBuying or selling an out-of-the-money put option and call option on the same underlying instrument with the same expiration. Profits are made only if there’s a drastic change in the underlying price.

Strike PriceThe stated price per share for which underlying stock may be purchased (in a call) or sold (in a put) by the option holder upon exercise of the option contract.




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SymbolLetters used to identify companies on the exchanges.

T

Target PriceThe price an investor hopes a stock will reach within a certain time period.

Technical AnalysisSecurity analysis that seeks to detect and interpret patterns in past security prices.

Technical AnalystsAnalysts who use mechanical rules to detect changes in the supply of and demand for a stock in order to capitalize on the expected change.

TickRefers to the minimum change in price a security can have either up or down.

Tick IndicatorA market indicator based on the number of stocks whose last trade was an uptick or a downtick. Used as an indicator of market sentiment or psychology to try to predict the market’s trend.

Ticker TapeComputerized device that relays to investors the stock symbols and the latest price and volume on those stocks as they are traded.

Time OrderAn order that becomes a market or limited price order, or is cancelled at a specific time.

Time Until ExpirationThe time remaining until a financial contract expires; also called time to maturity.

Toronto Stock Exchange (TSE)Canada’s largest stock exchange, trading approximately 1,200 company stocks and 33 options.

Total CostThe price paid for a security, plus the commission and any accrued interest owed to the seller (as with a bond).

Total Dollar ReturnThe dollar return on a nondollar investment, including the sum of any dividend/interest income, capital gains or losses, and currency gains or losses on the investment.

Total ReturnIn performance measurement, the actual rate of return realized over an evaluation period.

Total RevenueTotal sales and other revenue for the period shown.




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Total VolumeThe total number of shares or contracts traded on national and regional exchanges in a stock, bond, commodity, future, or option on a certain day.

Tracking StockA stock used for internal evaluation. For example, a firm with four divisions might set up four tracking stocks. The value-weighted sum of the four stocks exactly equals the firm’s stock price observed in the market.

TradeAn oral (or electronic) transaction involving one party buying a security from another party. Once a trade is consummated, it is considered “done” or final. Settlement occurs 1-5 business days later.

TradersIndividuals who take positions in stock investments with the objective of making profits. Traders take proprietary positions in which they seek to profit from the directional movement of prices or spread positions that can be held for long term or short term.

TradingThe buying and selling of securities.

Trading CostsCosts of buying and selling securities; includes commissions, slippage, and the bid/ask spread.

Trading PatternThe long-range direction of a security’s price, charted by drawing a line connecting the highest prices the security has reached and another line connecting the lowest prices at which the security has traded over the same period.

Trading ProfitThe profit earned on short-term trades of securities held for less than one year, subject to tax at normal income tax rates.

Trading RangeThe difference between the high and low prices traded during a period of time. For commodities, the high/low price limit an exchange establishes a specific commodity for any one day’s trading.

Trading UnitThe number of shares of a particular security used as the acceptable quantity for trading on the exchanges.

Trading VolumeThe number of shares transacted every day. Because there is a seller for every buyer, trading volume is half of the number of shares traded.

TransactionThe delivery of a security by a seller and its acceptance by the buyer.

Transactions CostsThe time, effort, and money necessary – including commission fees and the cost of physically moving the asset – from seller to buyer.

TrendThe general direction of the market.




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TrendlineA technical chart line that depicts the past movement of a security, and that is used to help predict future price movements.

U

Uncovered CallA short call option position in which you do not own shares of the underlying stock represented by the option contracts. These are much riskier than a covered call when you own the underlying stock. If the buyer of a call exercises the option to call, you are forced to buy the asset at the current market price.

Uncovered PutA short put option position in which you do not have a corresponding short stock position or you have not deposited cash or cash equivalents equal to the exercise value of the put. You have pledged to buy the asset at a certain price if the buyer of the option chooses to exercise it. Uncovered put options limit the risk to the value of the stock (adjusted for premium received.) Also called naked puts.

Underlying AssetThe security agreement of an option that gives the option holder the right to buy or to sell.

Underlying SecurityFor options, the security that is subject to being purchased or sold upon exercise of an option contract.

UnderperformWhen a security is expected to or does appreciate at a slower rate than the overall performance of the market.

UndervaluedA stock price perceived to be too low, as indicated by a particular valuation model. For instance, a particular company’s stock price may be considered cheap if the company price-earnings ratio is much lower than the industry average.

UnderwriteTo guarantee the issuer of securities a specified price by entering into a purchase and sale agreement. To bring securities to market.

UnderwriterA firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors. A party that guarantees the proceeds to the firm from a security sale, thereby in effect taking ownership of the securities.

Unissued StockShares authorized in a corporation’s charter but not issued.

Unmargined AccountA cash account held at a brokerage firm.

UpMarket indication that securities, or the market in general, is doing well in volume trading.

UptickAn upward price movement in a particular stock. A trade occurring at a price higher than the previous sale.




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UpgradingRaising the quality rating of a security because of new optimism about the prospects due to tangible/intangible factors. This can increase investor confidence and push up the price of the security.

Upside PotentialThe amount by which analysts or investors expect the price of a security may increase.

UpswingAn upward turn in a security’s price after a period of falling prices.

Uptick TradeA transaction taking place at a higher price than the preceding transaction involving the same security.

V

V FormationA technical chart pattern that follows a letter “V” form, indicating that the security price has bottomed out and is currently in a bullish trend.

ValuationA determination of the value of a company’s stock based on earnings and the market value of assets.

Value BrokerA discount broker whose rates are a percentage of the dollar value of each transaction.

VariableAn element in a model; variables change through time and are not constant.

VolatilityA measure of risk based on the standard deviation of the asset return.

Volatility RiskThe risk in the value of options portfolios due to the unpredictable changes in the underlying asset volatility.

VolumeThe daily number of shares of a security that change hands between a buyer and a seller.

Volume DiscountA reduction in price based on the purchase of a large quantity.

W

Wall StreetGeneric term for the securities industry firms that buy, sell, and underwrite securities.

WatchlistA list of securities selected for special surveillance, usually as potential investments.




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Weak MarketA market with few buyers and many sellers, and a declining trend in prices.

Well-Diversified PortfolioA portfolio that includes a variety of securities in order to approximate the overall market risk. The unsystematic risk of each security is diversified throughout the portfolio.

WriterThe seller of an option who issues the option and, consequently, has the obligation to sell the asset (if a call) or to buy the asset (if a put) on which the option is written if the option buyer exercises the option.

Y

Year-End DividendA special dividend declared at the end of a fiscal year that usually represents higher-than-expected company profits.

Year-to-Date (YTD)The period beginning at the start of the calendar year up to the current date.

YieldThe percentage rate of return paid on a stock in the form of dividends.

Yo-Yo StockA highly volatile stock that moves up and down like a yo-yo.




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11. Glossary

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