Beginning Investing - a Glossary of Stock Market Terms
Beginning investing in the stock market means that, if you want to be fully comfortable with what's happening around you, you'll have to learn a new 'language', the jargon of investing. Our glossary of terms for beginning investors will get you up to speed with the words you need to know. In fact, if you read this from A to Z, you'll know more than many seasoned pros!
the SEC recognizes a certain type of investor as financially sophisticated, and therefore able to invest in hedge funds, angel partnerships, and other higher-risk investments without restriction. To qualify as an accredited investor you must earn an individual income of at least $200,000 a year ($300,000 for a joint income) for the last two years and expect to make at least that amount this year, or have a net worth, either individually or with your spouse, exceeding $1 million, not including the value of your main residence. I think this is a nice target - we should all strive to become accredited investors!
can have a simple meaning of an individual repeatedly buying shares in the same company, but it is more often used to indicate one or more institutions building large positions in a stock. It is the opposite of distribution. There is a technical indicator, the accumulation/distribution line, which purports to highlight whether the large players are accumulating or distributing positions, by associating volume with price changes.
popularized by Perry Kaufman and Tushar Chande, AMA’s seek to overcome some of the weaknesses of ordinary moving averages. Slow moving averages (bigger number of days) are the most reliable, helping us to trade in the direction of the prevailing trend. However, in periods of rapid price moves, they will tend to react too slowly, missing some of the gain if prices are moving up, or signaling an exit too slowly when prices are falling. Faster moving averages (smaller number of days) are good at catching rapid price moves, but they tend to react too much to random ‘noise’, the day-to-day fluctuations in price, and we get ‘whipsawed’ in and out of trades. Adaptive moving averages measure the rate of price change, and use this to speed up or slow down the average, as necessary. For the full rationale and methodology, see Perry Kaufman’s book.
a set of rules for defining the timing, price, or quantity of an entry or exit
decision. Algorithmic trading, also called black box trading, describes the method widely used by the major institutional investors
– they program their trading ‘rules’ into their computers, and the computers automatically execute the trades.
used mostly when referring to the performance of a particular fund, alpha is the risk-adjusted measure of the return on investment (ROI). If alpha is positive, the fund has exceeded the risk-adjusted rate of return. If it is negative, the fund has earned less than the risk-adjusted rate of return. Negative alpha does not mean negative returns, just less than what should have been earned for the given level of risk.
an ADR is a negotiable security issued by a U.S. bank representing shares of a non-U.S. company traded on a U.S. exchange. ADR’s are denominated in, and pay dividends in, U.S. Dollars.
actually it’s now called NYSE Amex Equities, but most people would still know it as AMEX. Now part of NYSE Euronext, the world’s biggest exchange group, it was acquired in 2008. It is situated in New York; the Amex equities trading floor now shares the NYSE trading floor at 11 Wall Street. Hours of trading are from 9:30am to 4:00pm.
a book entry (i.e. no cash involved) to write off a portion of intangible assets against profits. We depreciate tangible assets, and we amortize intangible assets.
a meeting of shareholders required to be held once a year within a specified time after the fiscal year end, to approve the company's financial statements.
a report of the activities and performance of the preceding year which a company makes to its stockholders once a year. Quoted companies are required to report every quarter, but the annual report is the company’s chance to impress the stockholders with a glossy brochure. Although similarly named, the annual report to the SEC on form 10K is a separate document. A lot of the content of the two annual reports may overlap, but they are pitched at two different audiences.
a method of trading taking advantage of market inefficiencies which have led to price differences for identical or similar securities.
a company’s assets are the things the company owns. Assets can be divided into two main types, current assets and fixed assets.
an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset class (stocks, fixed income, and cash) in an investment portfolio according to the investors risk tolerance, goals and investment time horizon.
the Average Directional Index (ADX), Minus Directional Indicator (-DI) and Plus Directional Indicator (+DI) represent a group of directional movement indicators that form a trading system developed by Welles Wilder.
a measure of the volatility of a security. The difference between the highs and lows for a given number of bars are summed, and then divided by the number of bars to give the ATR. It can be used in setting stops, to keep the stop out of the range of the average daily fluctuations.
a listing of the assets and liabilities of a company as at a certain date. If the earnings statement can be said to be like a ‘video replay’ of the preceding year’s trading, then the balance sheet is a ‘snapshot’ of the position at the end.
also called ‘range trading’, this is a trading system based on the tendency of the prices of certain securities to trade within a band, up to resistance and down to support. Bands can also enable us to spot a breakout from a range.
 band trading - click to enlarge |
a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta gives an indication of the sensitivity of a security to market moves, i.e. a beta of 2.0 would suggest that if the market rises 5%, this stock may rise 10% (and of course vice versa for a fall). A negative beta would suggest that the security tends to move opposite to the market as a whole.
a large number of shares in a company, sold as a unit, normally traded by institutions. One block of shares in the U.S. markets comprises 10,000 shares.
according to NYSE, a blue-chip stock is stock in a company with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. Blue chips include, but are not limited to, the 30 stocks of the Dow (DJIA).
created by John Bollinger in the 1980’s, Bollinger bands are trading bands above and below the price which adapt to volatility, automatically widening when volatility increases and narrowing when it decreases.
open positions; someone who publicly recommends stocks which they own could be said to be ‘talking their book’.
the value of a company according to its latest financial statements. The book value per share is equal to the shareholders’ equity divided by the number of shares in issue. It is not linked to the stock price, and for investment purposes it is really rather meaningless.
a price movement through an identified level of support or resistance, breaking out of a previous trading range, usually accompanied by heavy volume and increased volatility. A breakout is taken to signify a continuing move in the same direction.
an agent who buys and sells shares from other market makers, i.e. they execute trades on behalf of others. Some firms are referred to as broker-dealers; when acting on behalf of a client they are brokers, and when they are trading for their own account they are dealers. You can see there may be some difficulty in avoiding conflicts of interest in this situation.
the part of the market where the investing institutions, such as mutual funds, hedge funds, pension funds and insurance firms, originate their orders; the other part is the sell side. Buy-side analysts make stock recommendations to their funds, but these analyst reports are for in-house consumption only. Individual investors are usually excluded from the buy side.
the benchmark index for the Paris Bourse (now Euronext Paris), comprising the 40 companies with the highest free float market capitalizations on the Bourse.
a type of chart, supposedly first used in 16th century Japan, depicting stock prices. Users believe that the candlesticks form patterns which can be interpreted to give the likely movement of future prices.
the value of funds, in both cash and stock, available for investment.
tax levied on profits arising from buying and selling securities. The method of calculation, the allowances, and the rates vary from country to country.
the measure of a company’s cash receipts less cash payments over a period of time. It is possible to have more cash going out than coming in, say during a period of heavy investment, but over the long run more cash must come in than go out for the company to survive. Investors can check a company’s cash flows by looking at the cash flow statement which is part of the company’s quarterly and annual reporting. This statement will show how much cash the company generated from its operations, how much it invested, and how it financed itself during the period.
chaos theory is an attempt to see and understand the underlying order of complex systems that may appear to be without order at first glance. In fact, chaos is a higher form of order where randomness and stimuli become the organizing principle. Related to financial markets, proponents of chaos theory believe it supplies us with a new and predictable way to analyze the current and future action of a stock – for more information see Trading Chaos, Second Edition by Bill Williams.
a change of trend direction that happens very quickly with little or no transition period. If a market has become very overextended in one direction, there comes a point when everyone has bought (or sold) and there is a sudden reversal. The resulting long bar pattern is called a spike.
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 climax reversal with spike - click to enlarge |
also called ordinary stock, this is the class of shares that bears the most risk (as the stockholders are the last ones to be paid out in a liquidation) but can reap the highest rewards (as the common stockholders are the residual owners of the company, after all other claims have been paid).
a term used to describe a largely-sideways movement of prices for a period. Even a strongly rising stock does not go straight up (or down) in value – it trends up, consolidates within a channel, then trends up again.
a security whose owner has the right to exchange it for something else, according to the terms of the instrument – so, for instance, a convertible preferred stock may be converted into a stated number of common shares within a fixed period.
denotes that a buyer of this stock will be entitled to receive a recently-declared dividend, provided they are still holding it when it goes ex-dividend.
a type of preferred stock with a provision which states that any missed dividends will be carried forward for future payment.
a company’s assets held for trading purposes – these assets, mainly comprising cash and equivalents, accounts receivable (amounts due from customers), and inventories, will be turned over or ‘realized’ within 12 months.
a company’s trading liabilities, mainly comprising short-term borrowings, accounts payable (amounts due to suppliers), and items such as unpaid payroll or income taxes, which will be turned over or repaid within 12 months.
the stock of a company in an industry which is very sensitive to business cycles, such as automobiles, steel, and housing.
a market index of 30 blue-chip stocks traded on the Frankfurt Stock Exchange.
a type of stock order which expires if not executed by the end of the day. This can be contrasted with a GTC (Good Till Cancelled) order.
a stock that tends to maintain its earnings and dividends even when the economy is performing badly. In this sense, it is the opposite of a cyclical stock. Examples are food, tobacco, oil, and utilities stocks.
a measure of the using up or wearing out of a fixed asset. Depreciation seeks to charge the cost of the asset against profits over its useful life. It is just a book entry, it does not entail any cash outlay – the cash went out when the company bought the asset – so the depreciation charge is always added back to operating earnings in arriving at the operating cash flow in the cash flow statement. By reducing the profit available for distribution by the amount of the depreciation charge, we are endeavoring to ensure that sufficient funds will be retained in the business to buy replacement assets at the end of their useful life.
to carry out a regular stock purchase through a broker requires a reasonable amount of money, as shares are normally traded in lots of 100. Some companies offer a scheme whereby regular savers or small investors can buy shares, or even partial shares, direct from the company. For a list of available companies (there may of course be others not on the list) go to Computershare here.
different trading systems have different responses when a setup is triggered. A discretionary trading system relies on a person’s judgment for making the entry and exit orders based on that setup; it is the opposite of systematic trading, which would place an order for all system-generated setups without question.
it has two meanings in investing jargon: 1) a payment of a dividend or capital gain to a stockholder, unitholder or bondholder 2) institutional selling of a stock over a period. See accumulation for a discussion of the accumulation/distribution line.
used in technical analysis to indicate two trend lines moving in different directions, often thought to give a strong signal for action. So for instance prices may be trending down while the MACD line has started to rise – this may indicate a buying opportunity..
 bullish divergence - click to enlarge |
the spreading of risk, either over different market sectors, or different asset classes. Warren Buffett is quoted as saying, “Wide diversification is only required when investors do not understand what they are doing.” However, if your skill level is below Mr. Buffett’s, most people would still regard it as a sound strategy.
a regular payment made to shareholders out of the accumulated profits of a company. The directors can declare interim and final dividends, based on their opinion of the company’s ability to pay, but the dividends must be approved by the shareholders in the Annual General Meeting. Different companies will have different dividend policies, but to generalize, young companies may pay little or no dividend as they can use their cash for organic growth, while older, mature companies may pay larger dividends as they have less growth opportunities.
computed as earnings per share divided by dividend per share, it shows the margin of safety for the dividend payment based on the previous period’s results.
it is normally difficult to reinvest a dividend through a broker, as the amount is often too small. Many companies offer a Dividend Re-investment Program (DRIP), whereby dividends are not paid in cash but are instead used to buy shares or parts of shares. This scheme allows the power of compounding to work its magic over time.
an investing method that encourages the investor to invest a constant dollar amount every month (or year, or whatever the investing interval is), as it is too difficult to pick tops and bottoms of prices, and over a long period they will even out.
a supposedly reliable chart signal, shaped like a ‘W’ on the chart. It implies that the stock has retested the lows, built its base, and is now set to climb. At the top of the chart we may encounter a double top, shaped like an ‘M’, signifying the end of a bull run.
also referred to as the DJIA, or just the Dow, it is an index of 30 major blue-chip U.S. companies, and is owned and computed by the CME Group. Components of the Dow trade on both NASDAQ OMX and NYSE Euronext. It has been criticized for being a price-weighted index, so that the more expensive counters will have a disproportionate influence on the index. However, along with the S&P 500 and the Nasdaq 100 index, it is a bellwether of the U.S. economy.
a measure of the largest amount a trading system can fall from peak to trough, derived either from back-testing or actual trading. Some people would not be comfortable trading a system, however good its annualized returns, if it can also deliver a 50% drawdown of capital.
a company’s profit from its operations (sales minus cost of sales and operating expenses), before taxation and financing expenses.
EBIT plus (add back to profit or deduct from loss) depreciation and amortization. It is an approximate measure of a company’s operational cash flow, although not a very good one as it doesn’t take into account changes in working capital.
after-tax earnings divided by the weighted average number of shares in issue for the period. Of great interest to the stockholder, it shows how much each of his shares has earned, and how many times the proposed dividend is covered by those earnings.
part of a company’s financial statements, it shows the trading results for the period. Can also be called Statement of Operations, Income Statement or P&L (profit & Loss) account.
a method of technical analysis of stock prices based on theories put forward by Ralph Nelson Elliott in his 1938 book. He observed that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns. He identified Impulse Waves, made up of five sub-waves, and Corrective Waves, made up of three sub-waves. Often combined with Fibonacci numbers. If you want to learn more, this is the Elliott Wavers' favorite book.
the term used for financial markets of rapidly developing countries. It is difficult to make an exact list of emerging markets; the best guides tend to be investment information sources like ISI Emerging Markets and The Economist or market index makers (such as Morgan Stanley Capital International). In recent years, new terms have emerged to describe the largest developing countries such as BRIC, for Brazil, Russia, India and China.
another term for stocks (or shares).
the buyer of this stock is not entitled to receive a recently-declared dividend, as the transaction will not be recorded before the record date. When a stock goes from cum-div to ex-div, we would expect the price to drop by the amount of the dividend.
the buyer of this stock is not entitled to receive a recently-declared rights issue, as the transaction will not be recorded before the record date. When a stock goes from cum-rights to ex-rights, we would expect the price to drop by the value of the rights.
an investment fund which trades on an exchange like a regular stock. ETF are much favored for their low costs, easy convertibility, and tax efficiency. They usually track indices, but they are also a low-cost way to diversify into commodities, precious metals, and many other asset classes. One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500 index and trades under the symbol SPY.
an open, organized marketplace in which securities, commodities, derivatives and other financial instruments are traded. Successful markets will have a real-time matching system for bids and asks, clearing and settlement systems, and fast price dissemination.
a measure of the profitability of a trading system, put forward by Van Tharp in his book, Trade Your Way to Financial Freedom. It is defined as (Win Rate * Average Win) minus (Loss Rate * Average Loss).
equals expectancy times number of opportunities in the period. You can understand that it’s pointless to have a system with a high expectancy if it only throws up one trade a year! Use expectunity to compare two systems, rather than expectancy.
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Leonardo of Pisa, also known as Fibonacci, was a 13th century mathematician who introduced the sequence now known as Fibonacci numbers. The sequence is arrived at by starting with the seed numbers 0 and 1, and then adding each number to its predecessor to give the next number, as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377… etc
The numbers seem to have some interesting properties. Each number is approximately 0.618 of the following number; 0.618 is also the ratio of the ‘golden mean’, used by artists throughout the ages. The sequence appears in nature, such as branching in trees, arrangement of leaves on a stem, the fruit spouts of a pineapple, the flowering of artichoke, an uncurling fern and the arrangement of a pine cone. In investing, Fibonacci numbers are often combined with Elliott Wave techniques, to predict the size of likely advances or retracements.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377… etc
The numbers seem to have some interesting properties. Each number is approximately 0.618 of the following number; 0.618 is also the ratio of the ‘golden mean’, used by artists throughout the ages. The sequence appears in nature, such as branching in trees, arrangement of leaves on a stem, the fruit spouts of a pineapple, the flowering of artichoke, an uncurling fern and the arrangement of a pine cone. In investing, Fibonacci numbers are often combined with Elliott Wave techniques, to predict the size of likely advances or retracements.
the period used by company’s for calculating their financial statements. Whilst many company’s choose to have fiscal and calendar years coinciding, others have mid-year ‘year-ends’, and some even use 52 week periods, so that the year-end date changes by a day or two every year.
assets which are expected to last for several years, such as plant, office machinery, and automobiles. The cost of these fixed assets is charged against profits over their expected useful life, as a depreciation charge.
operating cash flow less investments in new fixed assets. Some capital-intensive businesses may appear to have a healthy cash flow, but most of this cash may be consumed replacing fixed assets. Free cash flow is needed to expand the business and pursue opportunities to build shareholder value.
shares available for trading by the general public, excluding those held by company officers and other controlling-interest investors.
informally known as the ‘footsie’, it is an index of the 100 most highly capitalized companies on the London Stock Exchange. The index is jointly owned by the Financial Times and the London Stock Exchange. FTSE 100 companies represent about 80% of the market capitalization of the whole London Stock Exchange.
the person responsible for implementing a fund’s investment strategy and managing its portfolio. Fund managers are paid a percentage of the value of their assets under management.
the study of the fundamental attributes of a business, with a view placing a valuation on the whole. This notional valuation can then be compared with the market valuation. to identify undervalued stocks for purchase. Warren Buffett is the greatest living exponent of this art.
standing for Generally Accepted Accounting Principles, GAAP is the framework, the set of rules, under which companies quoted on a U.S. exchange must prepare their financial statements. However, these standards are not universal – for instance, companies in the U.K .prepare their financial statements under IAS (international Accounting Standards).
a stock of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. Growth companies generally pay small or no dividends, as cash can be profitably reinvested.
a fairly self-explanatory type of order – you place the order, and the broker will keep it on his books until execution or cancellation (but there may be some in-house rules on maximum holding time).
one of the ‘classic’ visual chart patterns. A Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline. For a full explanation of the various rules, including the role volume plays in a valid pattern, read StockCharts.com here.
a private investment fund that participates in a range of assets and a variety of investment strategies intended to protect the fund's investors from downturns in the market while maximizing returns on market upswings. Hedge funds are often aggressively managed – they need to generate high returns in order to justify the high management fees. Hedge funds are not for the man in the street – in the U.S. the regulations ensure that they are targeted at accredited investors.
HFT uses complex computer algorithms and sometimes specialized hardware to hold short-term (anything from a few seconds to several hours) positions in equities, options, futures, ETFs, currencies, and other financial instruments that possess electronic trading capability. High-frequency traders compete on the basis of speed with other high frequency traders for very small, consistent profits. According to Thomson-Reuters, 60% of exchange volume now comes from HFT.
a numerical representation of price movements on an exchange.
a mutual fund, unit trust or ETF which tracks a market index by holding the index securities in the correct ratio. It is a passive fund, i.e. no active investment decisions are required, so you can train a monkey to do it (well not really, but almost), thus keeping costs down.
when owners or initial venture capital investors in a successful private company want either to raise cash for expansion, or to cash out part of their holdings, the usual route is to offer shares to the public through an IPO. An underwriter (depending on the size of the issue it may be a consortium of banks with a lead manager) will be appointed to advise on when to go to market, how to structure the capital, how much to raise, and at what price. The underwriter will guarantee to take up any unsold shares, for a fee of course.
exchanges, and the bodies that regulate them such as the Securities and Exchange Commission (SEC), do their best to offer a level playing field to investors. Of course there are some advantages that the big players have, like HFT, because they have deep pockets and can afford supercomputers and complex algorithms, but the SEC likes to try and ensure that sensitive information is available to everyone at the same time. There is a whole industry dedicated to trying to anticipate companies’ results before they are published, but there are certain lines that cannot be crossed. If you have ‘inside’ information not publicly available, and you act on that information, it can result in prosecution - even if you lose money on the transaction!
a large body which invests other people’s money. Examples are banks, insurance companies, pension funds, local governments, mutual funds, hedge funds, and sovereign wealth funds.
literally assets that can’t be touched, such as brand value, patents, and goodwill on acquisitions.
the last price at which this stock traded. Remember, there is a bid price and an offer price – only when one side or the other ‘blinks’ and meets the bid or the offer will you have a trade, and that will mark the last price.
amounts that you, or a company, owe.
a fairly self-explanatory order type. You give the instruction to buy or sell, but you set a limit to the price you are willing to pay or receive. If the price is not available, the order will not be executed.
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buying ‘on margin’ means buying securities using money advanced by your broker. If the value of those securities then falls, you will get a ‘margin call’, asking to make up the difference. The rationale behind trading on margin is that it increases your financial leverage, but it also magnifies your financial exposure, so it is not recommended for beginning investors.
the total market value of a company, computed as number in shares in issue times market price.
an order to be executed ‘at market’. This will guarantee execution, but the price you get may be more or less than you expect (slippage).
momentum investing aims to make money by riding trends, jumping on board fast-rising stocks, and bailing out when they slow down.
an open-ended investment fund that earns income by investing in top-quality short-term securities such as Treasury bills and commercial paper. Because of their secure nature, investors should consider keeping their cash holdings in money market funds.
an average of stock prices over a selected look-back period,updated each period. The average is usually charted and superimposed on a bar or candlestick chart of prices. The average can be simple or exponential, the latter giving a heavier weighting to more recent prices.
this is going to sound complicated, but stick with us, this is one of our favorite technical indicators. Invented by Gerald Appel in the late 1970’s, it is used to spot changes in the strength, direction, momentum, and duration of a trend in a stock's price. The MACD line (colored blue by convention) is computed by taking the difference between a long (normally 26-day) exponential moving average (EMA) and a short (normally 12 –day) EMA. A 9-day EMA of this blue line is then plotted as a signal line (usually colored red). Finally, a histogram of the difference between the blue and red lines is plotted. The blue line crossing the red signal line from below can be used as a buy signal, but we feel the strength of this indicator lies in its ability to forecast price moves through divergences.
click to enlarge
a professionally managed type of collective investment that pools money from many investors to buy stocks, bonds, money market instruments and other securities. Most mutual funds are open-ended meaning that new funds are just added in. The value of units in the fund is computed once a day at the end of the day, and units can be sold back to the fund at that value. Income of the fund, earned through dividends or interest received is paid out to the unit-holders as a distribution, after deducting the fund’s management fees. Exchange Traded Funds have captured some of the mutual fund business, because of their lower charges and the fact that a price is available at any time, not just at the end of the day.
an index of the 100 largest non-financial companies on the Nasdaq. It is based on market capitalization, with some modification to cap the influence of some large counters. It differs from the Dow and the S&P 500 because it does not include financial companies, and because it includes some companies headquartered outside the U.S. Don’t confuse this index with the Nasdaq Composite, made up of all shares traded on the Nasdaq.
the world’s largest exchange company. As well as the Nasdaq (which originally stood for the National Association of Securities Dealers Automated Quotations) it owns the Boston and Philadelphia Stock Exchanges, and through its acquisition of OMX it owns 7 Nordic and Baltic exchanges.
also known as net income or net profit, it is the final result after deducting all costs, financial expenses and taxes. It is usually the last line on the earnings statement, so it is also informally known as the 'bottom line'.
an American stock exchange owned by NYSE Euronext. The NYSE Amex is located in New York City, where it shares the trading floor with the NYSE at 11 Wall Street. Historically it was a strong competitor to the NYSE, but that role has since been filled by the Nasdaq. Today, almost all trading on the AMEX is in small-cap stocks, exchange-traded funds and derivatives, but it still handles around 10% of U.S. trading volume, and is the second-largest floor-based exchange.
a Euro-American for-profit corporation that manages multiple exchanges, notably the New York Stock Exchange and Euronext, which itself comprised the stock exchanges of Amsterdam, Brussels, Paris, and Lisbon, plus the London International Financial Futures Exchange (LIFFE). The shareholders of NYSE Euronext have accepted a bid from Deutsche Börse, and approval is now awaited from the U.S. and European authorities.
a parcel of shares which is less than the standard lot size – for example, in the U.S. the standard lot is 100 shares, so a parcel of 57 shares would be an odd lot.
sometimes two large institutions will get together to transact a block of shares without going through the exchange, i.e. off the ‘board’. These sorts of transactions are sometimes referred to as ‘dark pools’. Also refers to any dealings in the over-the-counter market.generated from its operations, how much it invested, and how it financed itself during the period.
the profit the business made from its operations, i.e before financing costs and taxation. For this reason, it is usually synonymous with EBIT.
give the holder the right but not the obligation to buy (call option) or sell (put option) the underlying security at a predetermined price (the strike price) before an expiry date. If the option is not exercised, it expires worthless. Can be traded for profit like any other instrument, but they are also often used for hedging.
a group of technical indicators used primarily to show overbought and oversold conditions. Oscillators are normally calculated to range between 0 and 100. Well known oscillators include RSI (Relative Strength Index), ROC (Rate of Change), and MFI (Money Flow Index).
securities trading other than on a formal exchange. Examples are institutions dealing direct with one another, or brokers selling unlisted shares in small companies.
to say a stock is overbought would be very subjective; however, technical analysts could objectively agree by looking at the RSI chart – if it is over 80, the stock is considered by most to be overbought (although even in this example there are different views on exactly what the number should be).
to have a larger percentage allocation than normal for a particular asset class – thus a fund manager might say that the fund is ‘overweight equities’.
calculated as stock price divided by earnings per share for the last financial year. The answer is the number of years it will take to cover today’s share price at last year’s rate of earnings. A beginning investor who buys a low P/E stock because they think they have spotted a bargain may be in for a disappointment – the reason it has a low P/E ratio may be because investors do not believe last year’s earnings can be maintained this year, and this may spell trouble ahead.
the nominal value of a share when it is first issued. As time goes by, it becomes more and more disconnected from the market price. For instance, Berkshire Hathaway B-shares with a par value of $0.0033 (one-third of a cent each) are quoted today at $76.38!
a price and time-based system devised by Welles Wilder. The system underpins rising prices with a trailing stop below the price; then when prices start to fall it indicates a trailing stop for a short position above the price.
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 parabolic stop and reverse - click to enlarge |
calculated as dividend per share divided by earnings per share for the fiscal year, it is the inverse of the dividend cover., and shows how much of the earnings have been paid out as dividend and (by deduction) how much retained.
stocks priced under a dollar in the U.S., or under a pound in the U.K.
a share allocation made by a company or an underwriter direct to an institution, as opposed to being offered to the public.
the science of managing risk in relation to trading capital so as to achieve your financial objectives. See Van Tharp’s excellent book, Definitive Guide to Position Sizing.
a class of stock which is a hybrid between a share and a bond, it carries a dividend but at a fixed rate. It normally has no voting rights, and in the event of liquidation of the company it is senior to common stock, but subordinate to a bond. There are special types of preferreds, such as convertible or cumulative.
someone who acts for their own account, rather than as an agent of another.
one of the well-worn phrases used by stock market commentators who have column inches to fill every day – as in ‘the market fell today on profit-taking’.
a person appointed to vote on behalf of another at company meetings.
that part of fundamental analysis where the investor looks at the intangible factors of the company as part of the process of assessing its health and future prospects. It is more subjective than quantitative analysis, which looks at hard numbers, and therefore harder to get right. Qualitative factors might include such things as the company’s business model, brand value, management expertise, research and development capability, and labor relations.
that part of fundamental analysis that looks at the hard numbers of the company, such as revenue, earnings, margins and market share.
according to Van Tharp in his book Trade Your Way to Financial Freedom, R stands for the amount risked on a particular trade, and the R-multiple is the profit or loss expressed in terms of R.
the rise in a stock, or the whole market, after a fall.
holders of a security who are on the company’s records, i.e. their Register of Members, on this date will be entitled to receive an announced dividend or distribution.
a Real Estate Investment Trust, a fund set up to own and manage income-producing real estate. Each REIT will normally specialize in a different area of the market, for instance commercial, industrial, retail, or residential. A REIT is quoted on an exchange like a regular share, and so it’s a highly liquid way to invest in property. A trust enjoys certain tax advantages, so it’s also tax-efficient.
developed by Welles Wilder, the RSI is a technical momentum indicator which measures the speed and change of price movements. It is calculated to range within 0 and 100, with a number 30 representing an oversold condition, and a number above 70 representing overbought.
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 relative strength index - click to enlarge |
a price on a chart which has been touched at least twice and preferably more, but which has not been exceeded – it seems to act as a ‘ceiling’ for the time being. However, when finally breached, the resistance price may become support for future price retracements.
 resistance - click to enlarge |
a price movement in the opposite direction of the prevailing trend, a pullback.
usually calculated as (operating profit / total assets) x 100, it is a measure of profitability, and shows how well the managers are employing the assets of the company to earn income. Two companies may have the same operating income, but if one has half the assets of the other we can say it is twice as profitable. It can be used to compare the performance of companies within the same sector, but it is not sensible to use it compare, say, a manufacturing company with a software company.
shows how well the managers of the company can generate earnings for the common shareholders from the invested capital. It is defined as (net earnings / shareholders equity) x 100. Net earnings are taken after preference dividends but before common stock dividends, and shareholders capital excludes preference shares.
a way to compare different possible investments. The formula is: (benefits / costs) x 100.
an issue of additional shares to raise capital. Shares are offered to shareholders in proportion to their existing shareholdings. Some rights issues are usually offered at a discount to market price, and the rights may themselves be traded without taking up the shares.
too big a subject for a short note! The main types of risk to be assessed for each investment are country risk, foreign exchange risk, interest rate risk, political risk, and market risk. If you invest $10,000 in a stock, in theory you are risking the whole amount, but in reality you should have a stop loss in place, so that the amount risked is only the difference between the purchase price and the stop loss. For more explanation see our page on position sizing.
when you enter a position, you should have two figures in mind: your stop loss, and your target price. Your risk is the difference between your purchase price and your stop; your reward is the difference between your target and your purchase price. You should always try to ensure that the trade you are considering is worthwhile, i.e. it has a risk/reward ratio of at least 2:1, and preferably 3:1.
the normal trading units for a stock. In the U.S. and the U.K. one lot is 100 shares.
a stock market index of the bottom 2,000 companies in the Russell 3000 Index. It is the standard benchmark for the performance of the small-cap and mid-cap sector.
a stock market index of 3,000 companies, representing around 98% of the tradable U.S. market.
a free-float capitalization weighted index of 500 large-cap stocks, selected for their liquidity and industry grouping to represent the risk/return profile of the large-cap universe. It is a bellwether of the U.S. economy, and because of its larger size it is more widely used as a benchmark by professionals than the Dow.
the act of profiting from very small price differences. Day-traders may attempt to grab one or two ticks with high volume; market makers attempt to scalp by profiting from the bid/ask spread.
the Securities and Exchange Commission is a federal agency, and the regulatory body for the securities industry, and the stock, options, and other electronic securities markets.
a share listing on an exchange other than the company's primary exchange. This may be done to raise additional capital, or to increase their international profile.
a financial market where previously-issued securities are bought or sold. Thus, all stock exchanges are actually secondary markets, as the shares traded there were previously issued by a company to an initial owner.
a mutual fund or exchange traded fund that concentrates its investments in one particular market sector.
a secular market trend is a long-term trend, typically driven by major national or world events, that lasts 5 to 25 years. A secular bear market consists of smaller bull markets and larger bear markets; a secular bull market consists of larger bull markets and smaller bear markets. Most people agree that the U.S. enjoyed a secular bull market from 1980 to 2000, and that it is currently in a secular bear market.
the broad term for any freely exchangeable, negotiable instrument representing financial value.
owners of securities can lend them to another party, to allow that party to short them. The owner will retain the right to dividends and other distributions, and will be paid a fee.
the side of the industry that deals with the general public, i.e. the retail brokers and research departments that sell securities and make recommendations for brokerage firms' customers.
the shareholders’ interest in the company, defined as total assets minus total liabilities.
if you have a short position, anticipating a fall in the stock price, but it continues to rise, you may have to cover your shorts, i.e. buy stocks to match your short positions.
a market which has no strong upward or downward bias.
the difference between the price at the time you place a market order and the price at which the order is executed.
a fund set up by a state to invest their surplus capital. The top three SWF's in 2010 were Abu Dhabi, Norway, and Saudi Arabia.
a market maker in an exchange. The specialist holds an inventory of stock, posts the bid and ask prices, manages limit orders and executes trades.
an extended price move at the top or bottom of a trend, signaling a trend reversal.
– a momentum oscillator developed by George C. Lane in the late 1950s. It shows the location of the closing price relative to its price range over a set number of periods. The theory behind this indicator is that, in an up-trending market, prices will tend to close near their highs, and vice versa.
a company may split its shares if it decides that each individual share is getting too expensive, thus reducing its liquidity. If the terms of the split are, say, 3 to 1, a holder of 100 shares before the split will end up with 300 shares after the split; however, the net assets of the company haven’t changed, so each share should be worth one-third of its pre-split value.
an order instructing your broker to sell if a stock should fall to a certain price. Actually there are two parts to the order – at what price should it trigger, and what action should be taken, i.e. market order, or limit order at a certain price.
a price on a chart which has been touched at least twice and preferably more, but which has not been breached – it seems to act as a ‘floor’ for the time being. However, when finally breached, the support price may become resistance for future price retracements.
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 support line - click to enlarge |
a short-term trading style that aims to capture profits on positions held for one to five days, so it sits between day trading and trend trading.
a set of rules for trading. A complete trading system should have rules for entry, stop loss, profit target, exit, and position sizing.
also called mechanical trading, it is trading according to a set of pre-determined rules, usually computer driven. True systematic trading leaves no room for discretion. The space between the two extremes of purely systematic and purely discretionary trading leaves plenty of room to find the degree of discretion that suits you.
on entering a trade, it is the price, set by you, at which you will exit the trade. But if and when you get there, will you exit or will you be greedy?
the forecasting of the likely direction of future price movements by reference to past prices. Technical analysts believe that everything known about a company and its future prospects is already in the stock price. You could say that one of the problems of technical analysis is the sheer number of indicators available – which ones do you look at? If you are going to be a technician, pick two or three indicators, back-test them to satisfy yourself that they give you a tradable edge, and then stick to them.
the smallest possible price move for a particular stock. Many U.S. exchanges have an official tick value of one cent, but the effective tick value, i.e. the one used by the market, can be quite different – don’t expect Berkshire Hathaway A-shares, currently around US$115,000 each, to trade in penny ticks!
a term from history, share prices used to be relayed to brokers via a small machine which printed the prices on continuous tapes, hence ‘watching the tape’. Nowadays we see the ticker at the bottom of the screen on the financial news channels, or scrolling on the outside of buildings in the financial district.
a stop loss which follows the share price as it moves upwards, but which never moves downwards. The objective is to lock in profits, but if the stop is too tight it may stop you out of a winning position prematurely.
a method of trading which seeks to capitalize on the tendency of market to move predominantly in one direction, either up or down. The idea is to trade in the direction of the trend, and hold until the trend reverses direction.
– a straight line drawn on a chart connecting at least two, and preferably more, points to highlight the dominant trend. By convention, the lines are drawn to connect the lows in an uptrend, and the highs in a downtrend. When a trend line is broken, it may indicate a reversal of trend direction.
 trend lines - click to enlarge |
the final hour of the stock trading session on the third Friday of March, June, September, and December, so called because at the end of the day the contracts for stock options, stock market index options, and stock market index futures expire simultaneously.
to have a smaller percentage allocation than normal for a particular asset class – thus a fund manager might say that they are ‘underweight equities’.
a financial institution, such as an investment bank, that administers the issuance of a security on behalf of the issuer. The underwriter will advise on the timing of the issue, the amount, the proportion of different share classes, and the issue price, and will undertake to buy an shares of the issue that are not taken up.
an upward movement in the price of a stock. The uptick rule states that a short sale can be executed only when the last sale of a stock is at a higher price than the immediately preceding sale. The rule was in effect in the U.S. markets from 1938 until 2007. Short sellers were blamed (a convenient scapegoat?) for exacerbating the 2008 crash in the markets, and the SEC is still debating whether to reintroduce the rule.
a very subjective term used to describe stocks that are trading for less than they are ‘worth’. One indication of a value stock is a high dividend yield. A value stock might be a stock in a mature industry with limited future growth prospects, but it might also be a stock which has been unfairly beaten down by the market, for example, in the opinion of Warren Buffett, Burlington Northern Santa Fe railroad.
a measure of the movements in a stock over time. The more extreme the movements are, the higher is the stock’s volatility. Stocks with a higher volatility will be more risky investments, but (remember the connection between risk and reward) can give greater rewards.
the number of shares of an individual stock, or the market, traded within a given time period.
a derivative security that entitles the holder to purchase securities (usually equities) from the issuer at a fixed exercise price within a certain time frame. They differ from options in that they are issued by companies or investment houses only – individuals cannot ‘write’ warrants like they can options.
the capital used by a company in trading, defined as current assets (principally cash and equivalents, accounts receivable, and inventories), minus current liabilities .