Investment Glossary

maximizing your funds

Investment Glossary

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Accumulation: The first phase of a bull market. Accumulation of shares while earnings are at their worst and the economy is declining.
Active Portfolio Management: The active selection of securities by a portfolio manager based on objectives, fundamental or technical data.
Adaptive Filter: The continuous updating of the weight of past prices for smoothing or forecasting purposes.
Advance/Decline Line: The number of stocks advancing during a day's trading are subtracted from the declining issues. The difference is added to or subtracted from a cumulative sum. Any failure of the a/d line to confirm a new high is a sign of weakness. Any failure of the a/d line to confirm a new low is a sign of strength.
Alpha: The premium a security earns above a set standard. Alpha is generally measured in terms of the S&P 500 Index. A measure of how a security performs independently of the market.
Annualized Rate of Return: The average return over a period of years, taking into account the effect of compounding. Also known as the compound growth rate. For example, a 100% return over five years is equivalent to an annualized rate of return of 18.2% per year.
Arbitrage: The simultaneous buying and selling of two or more different, but closely related securities, in different markets to take advantage of price disparities. An attempt to profit from differences in security prices, such as disparities between the value of a stock index future and the value of the stocks that make up the index, by buying the undervalued security and selling the overvalued security.
Area Pattern: A chart pattern form when a security's price trend has stalled. This price movement forms a pattern, some of which may have predictive value. Examples: head & shoulders, triangles, pennants, flags, and wedges.
Arms Index: Developed by Richard Arms, this is indicator uses advances and declines in the market to establish an index to predict overbought or oversold conditions. A reading above 1 is considered bearish. An index below 1 is bullish. The higher or lower the reading the more bullish or bearish conditions are. Normal market conditions the index usually ranges between .40 and .60. The formula for the Arm's Index is: ((# of advancing issues/ # of declining issues)/ (Total up volume/ Total down volume)).
Ascending Trend Channel: The tops of an ascending price line which develop along a line parallel to the trend line and sloping upward across the base of the down price waves.
At-The-Money: An option whose strike price is equal to the price of the underlying security.
At Maturity: At Maturity takes into account the possibility that a security may be called by the issuer before its stated maturity date. In this case, the bond trades as though it had a shorter maturity than its stated maturity.
Average Maturity: For a bond portfolio, the average of the stated maturity dates of the debt securities in the portfolio. In general, the longer the average maturity, the greater the fund's sensitivity to interest-rate changes, which means greater price fluctuation. A shorter average maturity generally provides a less sensitive, less volatile portfolio.
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Back Testing: Optimizing a trading strategy using historical data and applying it to more current data to determine how well a trading strategy works.
Balanced Fund: A fund that seeks both growth and income, with stability of principal, through a portfolio that includes both stocks and bonds.
Bar Chart: A chart used in technical analysis where bars represent daily prices. A bar chart normally shows high, low and closing prices for a day's trading activity.
Basis Point: One one-hundredth of one per cent (.001).
Bear Market: A prolonged period of declining stock prices, usually defined as a decline of 20% or more from their highs.
Bear Spread: An option strategy in which the maximum profit occurs when the price of the underlying security declines or maximum losses occur if the underlying security rises in price. The spread involves the purchase and simultaneous sale of options. Puts or calls can be used. Using options with the same expiration date, a higher strike price is purchased and a lower strike price is sold.
Bear Trap: A false technical signal which signals that the rising trend of a stock or index has reversed when it has not.
Bellwether: An established stock market leader. IBM, Microsoft, and General Motors are stocks commonly referred to as bellwethers.
Benchmark: A standard, usually an unmanaged index, used for comparative purposes in assessing stock market or mutual fund performance.
Beneficiary: A recipient of proceeds from a qualified retirement plan or insurance policy upon the death of the registered owner.
Beta: A measure of the price movement in relation to the Standard & Poor's 500 Index. A beta of 1.0 is means the stock or mutual fund performed equally to the S&P. A beta of higher than 1.0 would indicate that the security is expected to be more volatile than the S&P; securities with betas lower than 1.0 are expected to be less volatile than the S&P.
Beta Coefficient: The degree of risk to a portfolio which cannot be decreased by diversification.
Black Scholes Option Pricing Model: A model used to estimate the price of an option.
Blue Chip: A high-quality, relatively low-risk investment; the term usually refers to stocks of large, well-established companies that have performed well over a long period.
Bond: A promissory note (debt security) issued by a government or corporation to raise capital.
Book Value: The net worth, or liquidating value, of a business. Calculated by subtracting from total assets all liabilities, including debt and preferred stocks, and dividing by the number of shares of common stock outstanding.
Bottom Up: An approach in investment strategy that emphasizes finding outstanding individual companies before considering broad economic trends.
Box Spread: Option arbitrage in which a profitable position is established with no risk. One spread is established with call options. The other spread is established using put options
Breadth (Market): Measures the number of stocks participating in a market move. The breadth can be positive or negative. In rallies, the number of advancing issues usually exceed declining issues, and vice versa. If the market breadth diverges from the direction of the market, it could signal a reverse in prices.
Broker/Dealer: A firm that brings buyers and sellers together in its function as broker and that also buys securities to sell while fulfilling its role as dealer. The terms broker, broker/dealer, and dealer are sometimes used interchangeably.
Bullish: Generally a longer period of time in which prices rise.
Bull Spread: An option strategy in which the maximum profit is attained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date.
Bull Trap: A false signal which is generated which indicates that the price of a stock or index has reversed to an upward trend but which proves to be false.
Butterfly Spread: An option strategy combining a bull and bear spread. Three strike prices are used. The lower two strike prices are used in the bull spread and the higher two strike prices are used in the bear spread. Either puts or calls can be used. This strategy has limited risk and limited profit.
Bull Market: A prolonged period of rising security prices. business cycle The rise and fall of a country's economic fortune over time, characterized by fluctuating employment levels, industrial productivity, and interest rates.
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Calendar Spread: An option strategy where a trader sells a shorter term option and buys a longer term option. Both options have the same strike price. For instance, a March 50 call might be sold and a May 50 call purchased.
Calendar Combination: An option strategy where a trader opens a call calendar spread and a put calendar spread at the same time. The strike price of the calls is higher than the strike price of the puts.
Callable: Refers to a bond whose issuer reserves the right to redeem it before it is due. This feature represents a risk to the investor in that bonds are generally called when interest rates fall, and thus usually can't be replaced with a similar yielding issue of the same quality.
Call Protection: A provision in a bond's indenture setting a certain period during which the bond cannot be called away by the issuer.
Call Option: A contract which gives the purchaser the right not the obligation to purchase the underlying security at a specific price within a specific time frame.
Call Price: The price at which a bond or preferred stock can be called in by the issuing authority.
Candlestick Charts: A charting method originally developed in Japan. The high and low are described as shadows and plotted as a single line. The price range between the open and close is plotted as a rectangle on the single line. If the close is above the open, the body of the rectangle is white. If the close of the day is below the open, the body of the rectangle is black.
Capital Appreciation: An increase in the value of an asset, such as mutual fund shares. Capital appreciation is the investment objective of mutual funds that purchase securities whose value is expected to rise.
Capital Gain Distribution: A payment to mutual fund shareholders of profits (long-term gains) realized on the sale of securities owned by a mutual fund. The net asset value of the fund is reduced by the amount of the capital gain distribution, and additional shares issued to the owner.
Capital Gain (Loss): A profit (selling price minus cost basis) or loss on the sale of a stock, bond or other asset. Short-term capital gainsrefer to a gain on assets held for one year or less. Long-term capital gains refer to gains on assets owned for more than one year.
capitalization: The market value of a company's outstanding securities. Companies with capitalizations under $250 million are considered small cap; from $250 million to $1 billion are considered mid cap; and over $1 billion are considered large cap.
Capital Spending: Money spent by businesses to purchase or upgrade equipment and facilities. One of the major components of economic growth, the other being consumer spending.
Capitalization Weighted Index: A stock index which calculated by adding the capitalization of each component stock and dividing by a predetermined divisor. Stocks with the greatest market values have the greatest impact on the index.
Cash Equivalent: A short-term money-market instrument, such as a Treasury bill or repurchase agreement, of such high liquidity and safety that it is considered as good as cash.
Certificate of Deposit (CD): A receipt for funds that have been deposited in a bank for a specific period of time at a fixed rate of interest.
Chaikin Oscillator: An oscillator created by subtracting a 10 day exponential moving average from a 3 day exponential moving average of the accumulation distribution line.
Closed-end Fund: A regulated investment company that offers a fixed number of shares, which are traded on a stock exchange, and can be traded in the same manner as stocks.
Confirmation (confirm): A trade ticket from a broker dealer evidencing the purchase or sale of a security.
Confirmation - Technical: The condition when two or more indicators or indexes corroborate a market turn or trend.
Congestion Area: A series of trading days in which there is little or no progress in price movement.
Correction: A decline in stock prices in reaction to a previous gain in prices.
Cup And Handle: A pattern on technical charts in which the price pattern can be seen as a cup orU and the handle has an upward or downward drift. The handle usually displays low trading volume.
Conversion Arbitrage: The simultaneous purchase of a stock, the purchase of a put, and the sale of a call in a riskless transaction.
Channel: Used in charting it establishes parallel lines connecting the low points and the high points in prices. Price channels can be ascending or descending.
Convertible Security: A security which is convertible into another. It generally describes convertible preferred stock and convertible bonds. The security has a specific conversion rate at which the security can be converted.
Cover: The purchase of stock to close a short sale transaction or on an option which was originally written.
Covered: The writing of an option when the writer also owns the underlying security on a one to one ratio.
Combined Purchase Privilege: A way for a mutual fund shareholder to qualify for a reduced sales charge by combining investments in different funds made at the same time into a single transaction. (Certain restrictions may apply.)
Commercial Paper: Corporate promissory notes issued to provide short-term financing, sold at a discount and redeemed at face value. A principal component of money market fund portfolios because of its high yield.
Common Stock: A security that represents ownership in a public corporation. Usually the first security a corporation issues to raise capital, common stock participates in the profits or losses of the issuing company.
Compounding: Interest paid on interest, resulting in an exponential rate of increase on the initial principal. For example, an investment yielding 5% compounding annually, a $1000 investment would be worth $1050 at the end of one year, and then would generate 5% of $1050 in the second year and so on.
Conservative: A cautious approach to investing that takes only prudent risks to seek a reasonable return.
Consumer Price Index: The change in consumer prices determined monthly by the U.S. Bureau of Labor Statistics, often cited as a general measure of inflation.
Cost Basis: The cost of an investment, used as the basis for calculating and reporting capital gains or losses. It is adjusted for stock splits, distributions, and return of capital.
Coupon Rate: The interest rate stated on the face of a debt security, such as a bond, expressed as a percentage of par value. Generally paid semi-annually.
Credit Rating: An evaluation of the creditworthiness of a debt security by an independent rating service.
Credit Risk: The potential for default by an issuer on its obligation to pay interest or principal on debt securities. The lesser the rating of the issue, the higher the interest rate the issuer must pay to attract investors.
Current Dividend Yield: The rate of payment for a security that distributes dividends expressed as a percentage of the current price.
Custodian: The bank or trust that holds a mutual fund's assets (stocks, bonds, cash, and other securities) and handles payments and receipts for the fund's securities transactions.
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Daily Range: The difference between the high and low price of a security during one trading day.
Debt Securities: General term for any security representing money loaned that must be repaid to the lender at a future date. Bonds, notes, bills, and money market instruments are all debt securities.
Deep Discount Bond: A bond selling considerably below par or face value.
Deflation: The opposite of inflation producing a decline in the prices of goods and services.
Delta: A calculation of the amount an option will change in price for a one point move in the underlying security.
Delta Neutral: An options strategy designed so that the position is insensitive to movements in the underlying security. It can be composed of options/options or options/ underlying security. It is a careful calculation of offsetting long and short positions.
Diagonal Spread: An options strategy in which options purchased have a longer maturity than the written options. The purchased options also have different strike prices. Examples of Diagonal Spreads are: diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.
Discount: An option is trading at a discount if it is selling for less than its intrinsic value.
Discount Rate: The interest rate charged by the Federal Reserve to member banks. Basically, the floor rate for interest rates in the economy.
Disinflation: A slowing of the rate at which prices are increasing.
Distribution: Payment of a dividend or capital gain by an open ended mutual fund. May be taken in cash or reinvested in additional shares of the fund. The condition in which shareholders are disposing of positions held.
Diversification: Spreading investments among many different securities or sectors to reduce the risk of owning any single investment.
Diversified: A mutual fund that meets certain legal requirements pertaining to the number of issuers represented in its portfolio, including a restriction that 75% of the portfolio be invested in at least 15 different issuers.
Dividend: A payment of cash from a company's profits to its stockholders. Dividends received by a mutual fund from its portfolio as distributed to its shareholders.
Dollar-Cost Averaging: An investment strategy based on making investments of equal amounts at regular intervals in the same fund or security. Because the shareholder buys more shares at lower prices and fewer shares at higher prices, the average cost of the shares purchased will generally be lower than the average price over the investment period. However, dollar-cost averaging does not ensure a profit or protect against a loss in a declining market.
Double Bottom/ Double Top: Technical reversal patterns. consisting of a decline or advance twice to the same level (plus or minus 3%), and providing support or resistance at that level.
Dow Jones Industrial Average ("the Dow"): The most commonly used indicator of stock market performance, based on the prices of 30 major industrial companies. Often simply called "the Dow."
Duration: A mathematical measure of a bond's sensitivity to changes in interest rates. Duration is stated in years; the shorter the duration, the lower the volatility of prices.
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Early Exercise: Exercise of an option prior to its expiration.
Elliot Wave Theory: Theory originally published by Ralph Nelson Elliot in 1939, it is a pattern recognition theory. It holds that the stock market follows a pattern of five waves up and three waves down to form a complete cycle.
Equity Security: A type of security representing ownership in a corporation. Common stock, preferred stock, and convertible securities are all equity securities.
Exercise: The right granted under the terms of a listed options contract. Call holders exercise their right to buy the underlying security. Put holders exercise their right to sell the underlying security. There is generally an exercise limit placed by the options exchange. This is to prevent a group of investors or an individual investor from cornering the market on an underlying security.
Equivolume Chart: Charting technique developed by Richard Arms (see Arm's Index) which measures the relationship between price and volume. Price is measured on the vertical axis and volume is measured on the horizontal axis.
Exponential Moving Average: Moving average in which the most recent prices are given more weight in the average than earlier prices. (See moving average)
ERISA: The Employee Retirement Income Security Act of 1974 that created rules covering qualified retirement savings plans.
Eurodollar CD: Short-term time deposits issued by European banks, often used by money market funds.
Exchange Privilege: The right to exchange from one mutual fund to another without incurring a sales charge, subject to rules on minimum holding periods, and minimum account values.
Ex-dividend: Means "without the dividend." Used to refer to a security that no longer has the right to receive the next dividend. An "x" will appear next to the name of the stock or fund to indicate that the share price has been reduced to reflect the value of the dividend.
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Face Value: The value of a bond stated on the bond certificate and the redemption value at maturity.
Fair Value: Describes the worth of an options or futures contract based on the value of the shares plus dividends on a discounted value. When fair value falls below a predetermined value, traders sell the cash index and buy futures or options. When fair value rises above a predetermined value, traders buy the cash index and sell futures or options.
Federal Reserve System: The central bank of the United States, which regulates credit and money supply in the economy. Includes the Federal Reserve Bank, 14 district banks, and the member banks of the Federal Reserve.
Fibonacci Ratio: The relationship between two numbers in the fibonacci sequence. The sequence for the first three numbers is 0.618, 1.0, and 1.618. In general terms the fibonacci series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc.
First Notice Day: The first day a buyer of a futures contract can be called upon to take delivery.
Float: The number of shares outstanding for a particular common stock.
Fiscal Year: An accounting period of 365 days (366 in leap years) in which a company prepares financial statements and performance data.
Fixed-income Security: A security that pays an unchanging rate of interest or dividends. Fixed-income securities include bonds, money market instruments, and preferred stock.
Forward Commitment: A purchase or sale of a security at a specified price with delivery and cash settlement at a specified future date.
Full Faith and Credit: An unconditional commitment to pay interest and principal on debt securities, usually securities issued or guaranteed by the U. S. Treasury and tax-exempt general obligation bonds.
Fundamental Analysis: The study of a corporation's business and financial status and competitive position used to help value the price of the firm's stock, and forecast future movements in its stock price. Considered are: the company's past record of earnings and sales growth, assets, management, market share, new products, and consistency of delivering results.
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Gamma: It measures the amount the delta changes for a 1 point move in the underlying security.
General Obligation Bond (GO): A municipal bond backed by the general credit of the issuing organization. General obligation bonds are more secure than revenue bonds and thus trade with a slightly lower yield.
Ginnie Mae Passthrough: A security backed by a pool of mortgages guaranteed by the Government National Mortgage Association (GNMA), with principal and interest payments made by homeowners "passed through" to the investor. Ginnie Maes are the highest-yielding government-guaranteed securities.
Good Till Canceled: An order placed with a broker meaning that it is good until either filled or canceled.
Government Security: Any debt obligation issued by the U.S. government or its agencies. Certain securities, such as Treasury bonds and Ginnie Maes, are backed by the government for both principal and interest payments. Other securities, such as those issued by the Federal Home Loan Mortgage Corporation, or Freddie Mac, are backed by the issuing agency.
Growth Investing: Purchases of stocks in companies whose earnings are growing rapidly and are likely to continue growing at a rate higher than other firms. Generally a more volatile investment strategy..
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Head & Shoulders Pattern: A reversal pattern beleived to be one of the more common and reliable patterns. It is comprised of a rally ending a fairly extensive advance, followed by a reaction on lower volume. This creates the left shoulder. The head is comprised of a rally up on high volume exceeding the price of the left sholder. And the head is comprised of a retracement to the previous low on light volume. The right shoulder is formed by an up rally which fails to exceed the height of the head. The major downtrend begins when prices break a horizontal line drawn along the bottoms of the previous lows from the left shoulder and head. The pattern can also be inverted at market bottoms.
Horizontal Spread: An options strategy where the options have the same strike and different expiration dates
Hedge: A strategy used to offset investment risk. In investing, hedging involves the purchase of an offsetting position, such as a put option or futures contract, to guard against the risk of a market decline. Often used as a defensive strategy in portfolios investing in non-U S. securities to reduce the negative effects of unfavorable moves in currency exchange rates.
Historical Yield: The actual yield of an investment over a given period, measured from the beginning of the period.
Holding Period: The length of time an investment must be in an account before it can be exchanged.
Horizontal Spread: An options strategy where two options have the same strike price but different expiration dates.
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Indenture: The formal contract governing a corporate bond that explains the bond's maturity, coupon rate, call privileges, and other rights.
Index: A benchmark against which to measure performance, such as Standard & Poor's 500 Index.
Individual Retirement Account (IRA): A retirement plan that allows individuals to contribute money on a tax-deferred basis to a retirement account each year.
Implied Volatility: A measurement of the volatility of a stock. Current price rather than historical price is used. Generally, if the price of an option rises without a corresponding rise in the underlying equity, implied volatility is considered to have risen.
Index Option: An option whose underlying security is an index. An example would be the S&P 500 (SPX). A trader can buy index options and bet on the direction of the S&P 500 Index.
Intermarket Spread: A spread using futures contracts in one market spread against futures contracts in another market. An example would be the Yen spread against the Deutschemark.
In-The-Money: A call option with a strike price below the underlying equity. A put option with a strike price above the underlying equity.
Inflation: A rise in the prices of goods and services, often equated with loss of purchasing power.
Initial Public Offering (IPO): A private company's first public offering of common stock.
Inside Day: A day in which the total range of price is within the range of the previous days price range.
Instrument: A legal document, such as a security.
Investment Company: A Regulated Investment Company that invests in the securities of other companies. Each open-end and closed-end fund is actually a separate investment company owned by its shareholders and governed by rules established in the Investment Company Act of 1940. An investment company combines the money from a number of investors and then invests the money in a larger diversified portfolio in accordance with the objectives of the owners.
Investment-Grade: Bonds suitable for purchase by prudent investors. Standard & Poor's and Moody's Investors Service designate bonds in their top four categories as investment grade.
Investment Objective: The goal an investor or a mutual fund seeks to accomplish. Investment objectives can include current income, capital appreciation, or a combination of objectives.
IRS: The Internal Revenue Service, created in 1913 to administer the collection of federal income taxes.
Island Reversal: A trading range in which an exhaustion gap down is followed by prices trading in a narrow range. A breakaway gap up leaves a pattern representing the "island" of prices in the middle.
Issue: A stock or bond offering sold by a corporate or government entity at a particular time.
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Joint Account: Any account owned by two or more people.
Jumbo CD: A certificate of deposit issued by banks in amounts over $1 million generally paying higher rates of interest than smaller certificates. Jumbo certificates are a major investment of money market mutual funds.
Junk Bond: Non-investment grade bonds, those with a credit rating of BB or lower.
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Large Cap: A company whose total market capitalization is $1 billion or more.
Leaps: Term Equity Anticipation Securities. Currently, these are long term options with expirations up to 2-1/2 years.
Leverage: The use of borrowed funds to increase the funds available for investment, used in order to achieve a greater rate of return for equity holders.
Leveraged Buyout (LBO): The purchase of a controlling interest in a company using borrowed money.
Limit Order: An order to buy or sell at a fixed price.
Limit Up/ Limit Down: Commodity and option exchange restrictions on the maximum amount of movement up or down that an option or commodity can trade in a given day.
Local: A trader in the pit of an exchange who buys or sells for his own account.
Lognormal Distribution: A statistical distribution often applied to stock prices. It implies that stock prices can rise infinitely but can not fall below zero.
Liquidity: The measure of the ability to easily turn assets into cash. An investor should be able to sell a liquid asset quickly with little effect on the price. Liquidity is a central objective of money market funds.
Long-term Investment Strategy: A strategy that responds to fundamental changes in the financial markets or the economy and ignores fads and day-to-day market noise.
Lump-sum Distribution: A single withdrawal of an account's entire value. Upon retirement, participants in an IRA or other qualified retirement plan can choose to receive a lump-sum distribution of the proceeds in their account. Certain lump-sum distributions qualify for special tax treatment.
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Management Company: The firm that organizes, manages, and administers a mutual fund, or an investment advisory firm which manages private funds.
Margin: The use of borrowed money from a brokerage to buy additional securities.
Margin Call: The demand by a brokerage to a margin investor to deposit additional equity due to the declin in value of securities below the minimum capital required by the exchanges or the brokerage to maintain a margin account.
Market Maker: An exchange member who makes a market by buying and selling for his own account. The primary source of liquidity in some markets.
Market Order: An order to buy or sell a security at the present market price. As long as there is a market for this security the order is filled. This type of order takes precedence over all other orders.
Market Not Held Order: This is a market order. However, the floor trader the discretion to execute the order when he feels it is best. If the floor trade feels that the market will decline, he may hold the order to try to get a better fill.
Market If Touched: An order with a broker which becomes a market order if a trigger price is reached.
Market Timing: A strategy of buying or selling securities in anticipation of changes in market or economic conditions.
Mark-to-Market: The process of valuing a fund's portfolio with current market prices in order to calculate a daily net asset value. Involves determining a fair value for securities not regularly traded.
Maturity Date: The date on which the principal of a bond must be repaid.
Momentum: The strength behind an upward or downward movement in price. An investment strategy in which an investor uses the percentage growth of momentum in earnings to buy or sell securities.
Money Market Fund: A fund designed to provide liquidity by investing in securities that mature in one year or less, such as bank certificates of deposit, commercial paper, and U.S. Treasury bills.
Moving Average: The maintenance of the average prices of a security for a predetermined period of time. A five day moving average, for instance, sums the prices for the previous 5 days, and is divided by 5. Go to the Education Center Lessons for more detailed information.
Moving Average of Convergence/Divergence (MACD): The crossing point of two exponentially smoothed moving averages which oscillate above and below an equilibrium line. Go to the Education Center for more detalied information.
Municipal Bond: A bond issued by a state, city, or other municipality to finance public works such as the construction of roads or schools. The interest is usually free from federal income tax and may be free from state and local taxes as well.
Mutual Fund: A Regulated Investment Company registered under the Investment Company Act of 1940, which sells shares to the public who then own the fund, and manages the funds received under the stated objectives.
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NASD: The National Association of Securities Dealers is an industry organization charged by Congress with standardizing investment practices and establishing high ethical standards in the financial community.
NASDAQ: A nationwide electronic system established by the NASD for price quotations and trading on Over The Counter stocks.
Negative Divergence: A condition in which two or more indicators, indexes, or averages, fail to show confirming trends of a price move.
Net Asset Value per share (NAV): The market value of one share of a mutual fund. The fund's NAV is calculated daily by taking the fund's total assets (securities, cash, and accrued earnings), subtracting the fund's liabilities, and dividing by the number of shares outstanding. The process of calculating the NAV is called pricing.
Niche: A small, focused market in which a company specializes. Niche companies are often favored investments because they can be well-insulated from competition.
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Open-end Investment Company: A mutual fund, so called because it continuously offers new shares to the public. A new buyer purchases shares at the same price as all other shareholders at the close of business on a given trading day.
Option: The right to buy or sell a given security within a particular time at a specified price. The right to buy is a call; the right to sell is a put. An option does not obligate the investor to complete a transaction, only the right to do so.
Open Interest: The net total number of outstanding contracts in a future or option.
Options Clearing Corporation (OCC): The issuer of all listed options on all exchanges.
Out Of The Money: A call option whose strike price is above the current market price of the underlying security or a put option whose strike price is below the current price of the underlying security.
Overbought: A condition in which market prices have risen too steeply and too quickly to be sustained.
Oversold: A condition in which market prices that have declined too steeply and too quickly to be sustained.
Over The Counter (OTC): The market for securities that are not traded on an organized stock exchange, as well as some listed securities traded off those exchanges. (Most government, municipal, and corporate bonds are also traded over the counter.)
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Par Value: The face value of a bond or stock as printed on the certificate. Bonds generally have a par value of $1,000.
Passive Portfolio Management
Establishing a portfolio using components of an index on an unmanaged basis. These portfolios track the market performance, and usually have lower operating costs.
Payable Date: The day on which a stock or mutual fund pays its dividend distributions to shareholders.
Point And Figure Chart: A chart which plots price only. Charts are prepared on graph paper where X's are placed in boxes representing up days and O's are placed in boxes representing down days.
Portfolio Insurance: Investment management designed to protect a portfolio of stocks by using index futures or options for downside protection.
Portfolio: The total of all investments held. A combination of securities.
Portfolio Turnover: A measure of the trading activity in a fund's portfolio of investments. The ratio of how frequently securities are bought and sold by a mutual fund.
Position Limit: The maximum number of option contracts on the same side of the market which can be held by any one investor or group of related investors.
Preferred Stock: A class of stock with a fixed dividend that has preference over a company's common stock in the payment of dividends and the liquidation of assets.
Premium: The price an investor pays the writer of an option above the option's intrinsic value. The amount paid in excess of par value for a bond or stock.
Prepayment Risk: The risk taken by an investor in mortgage backed securities that homeowners will pay off their mortgage loans early, resulting in early retirement of the securities.
Pre-refunding: A procedure used by state and local governments to refinance municipal bonds to lower interest expenses. The issuer sells new bonds with a lower yield and uses the proceeds to buy U.S. Treasury securities, the interest from which is used to make payments on the higher-yielding bonds. Because of this collateral, prerefunding generally raises a bond's credit rating and thus its value because of this collateral.
Price to Earnings Ratio (P/E ratio): The ratio of a corporation's earnings to price calculated by dividing the stock closing price by its consensus annual earnings per share. Growth stocks tend toward a high P/E ratio compared to income or blue chip stocks.
Prime Rate: The interest rate a bank charges on loans to its most creditworthy customers. Frequently cited as a standard for general interest-rate levels in the economy.
Private Placement: The sale of securities to a limited number of investors at the initial stages of a company's operations, a private placement allows investors to invest in attractive companies before the company sells stock to the public.
Program Trading: Trades based on signals from computer programs and entered and executed directly from the traders computer to the market's computer where trades are matched.
Profit Margin: The amount by which a company's sales and other earnings exceed its expenses, expressed as a percentage.
Profit-Taking: Selling securities after they have risen in value to realize a gain.
Prospectus: The official legal document that describes a mutual fund or corporation which offers its shares for sale. By law, a prospectus must be given to all investors before they invest.
Proxy: A written authorization that allows one person to act for another. For example, shareholders who are unable to attend a fund's annual meeting may mail in their ballots and vote by proxy.
Prudent Man Rule: The legal foundation for professional investment management, which requires one who controls funds for others to act solely for the benefit of the client.
Public Book: The public orders to buy or sell a security which are not market orders.
Put Option: A contract which gives the purchaser the right, not the obligation, to sell a security at a specific price in a specified period of time.
Put Call Ratio: The ratio of put trading volume divided by the call trading volume.
Public Offering Price (POP): The purchase price of one share of an open-end mutual fund, including the sales charge. The POP is equal to the NAV plus the sales charge.
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Qualified Retirement Plan: A retirement plan that meets certain IRS requirements, including that it be in writing, be fully funded, and not discriminate in favor of highly paid employees.
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R2: A measurement of investment risk that shows how closely the portfolio's performance correlates with the performance of a benchmark index such as the Standard and Poor's(r) 500 Index-and thus indicates how closely that performance is linked to the broad market. A high R2 signifies that the portfolio's fluctuations generally reflect market moves, while a low R2 indicates that other factors tend to drive fund performance.
Rally: A substantial rise in the price of a security or an entire market.
Ratio Calendar Combination: An option strategy in which an investor holds at the same time a ratio calendar spread using calls and a ratio calendar spread using puts. The strike price of the calls is greater than the strike price of the puts.
Ratio Calendar Spread: Option strategy using either puts or calls, in which an investor sells more near term options than longer term options are purchased. All options have the same strike price.
Ratio Spread: An option strategy using puts or calls. An investor buys option contracts then sells a larger number of out of the money options.
Ratio Write: Buying stock and selling calls against the stock. It can also be constructed by shorting stock and then selling puts against the short stock.
Real Rate of Return: The return on an investment after it is adjusted for the effects of time. See the Rate of Return Calculator in the Tools Section.
Relative Strength: A comparison of an individual stock's performance to that of a market index, usually the S&P 500 or the Dow Jones Industrial Average. It is calculated by dividing the stock price by the index price. A rising line indicates that the stock is doing better than the market. A declining line indicates that the stock is not doing as well as the market.
Record Date: The date that determines which shareholders will be paid the dividend or capital gain declared by a corporation or mutual fund. Only shareholders who are invested at the opening of business on the record date will receive the distribution.
Redemption: The process of converting shares into cash. Any open-end mutual fund must redeem shares at the current price from a registered shareholder upon request.
Reinvestment Privilege: The right of shareholders to use income and/or capital gain distributions to purchase additional shares of their fund without paying a sales charge.
Repurchase Agreement (repo): A purchase of U.S. government securities from a bank or broker made under the stipulation that the seller agrees to buy back or "repurchase" the securities at a fixed price on a future date.
Resistance: A price level where a security's price stops rising and moves sideways or downward. It indicates an abundance of supply. Because of this, the stock may have difficulty rising above this level. There are short term and longer term resistance levels.
Return On Assets: Net earnings of a company divided by its assets.
Return On Equity: Net earnings of a company divided by its equity.
Return of Capital: A fund distribution that exceeds earned income-that is, a distribution that includes a portion of the investor's original principal. Return of capital is sometimes distributed to maintain the level of the distribution when income is not adequate to do so. It is generally not subject to taxes.
Revenue Bond: A municipal bond that is backed by the revenue from the project being financed. Revenue bonds are less securely backed than general obligation bonds, and thus may trade with higher yields.
Rights of Accumulation (ROA): A way for a shareholder to qualify for a reduced sales charge by adding the value of shares already owned in the accounts to the amount of a new purchase. Also referred to as cumulative quantity discount.
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Sales Charge: A fee charged when shares are purchased (front-end) or redeemed (CDSC). Also called a load. Most of the sales charge is returned to the broker as commission; a smaller portion is retained by the mutual fund company. Reinvested dividends and capital gains generally are not assessed a sales charge.
Securities and Exchange Commission (SEC): The federal agency created by the Securities and Exchange Act of 1934 that administers the laws governing the securities markets. The SEC regulates the registration and distribution of mutual fund shares.
Sector Fund: A specialized mutual fund that invests exclusively in a related group of industries offering better opportunities for capital appreciation. Sector funds are often more volatile than funds that invest in a more diversified range of industries.
Self-directed Retirement Account: A retirement account offered through an investment dealer that can include stock, bonds, and mutual funds. So called because the investors are free to make their own investment decisions.
Settlement Date: The date when payment for a purchase or redemption is required. Funds purchased through a dealer firm are normally settled five business days after the trade date. Funds purchased directly by a shareholder settle on the day payment is received. Stock transactions are required to be settled in three days.
Share: A unit of ownership in a fund or corporation.
Shareholder: An owner of shares of a mutual fund or corporation.
SEP (Simplified Employee Pension Plan): A retirement plan that allows small businesses to contribute to IRAs for their employees.
Small Cap Stock: Refers to a company whose total market capitalization is less than $250 million.
Secondary Market: A market available to trade securities after their initial public offering. The New York Stock Exchange is an example of a secondary market.
Selling Short: Selling a security and then borrowing the security with the intent of replacing that security at a lower price than it was borrowed. The short trader is betting that the price of the security will go down.
Short Interest: Shares that have been sold short and not yet repurchased.
Short Interest Ratio: A ratio which tells how many days it would take to buy back all the share which have been sold short. A short interest ratio of 2 would indicate that it would take 2 trading days to buy back all the shares which have been sold short. This is based on the current volume.
Slippage: The difference between estimated and actual transaction costs. The difference is usually comprised of commissions and price differences. Something New Yorkers do during the winter.
Spread Strategy: An option strategy having both long and short options on the same underlying security.
Spot Month: The current trading month. Also known as the front month in commodity trading.
Spot Price: The current cash price for which a commodity is trading at a specific time and place.
Stop Order: An order placed which is not at the current market price. It becomes a market order once the security touches the specified price. Buy stop orders are placed above the present market price. Sell stop orders are placed below the present market price.
Stop Limit Order: This is similar to a stop order. It is an order which becomes a limit order once the specified price is touched.
Stop And Reverse: A stop that hits a signal to close the current position and open an opposite position. A trader holding a long position would sell that position and then go short on the same security.
Straddle: An options strategy where the purchase or sale of an equal number of puts and calls is made. The same strike price and expiration date is the same for all.
Specialist: An exchange member who keeps the public book, maintains an orderly and efficient market, buys and sells for his own account.
Standard & Poor's 500 Index: A daily measure of stock market performance, based on the performance of 500 major companies. Though it does not include transaction or management costs, the S&P 500 is often used as a yardstick for equity fund performance. The index is a registered trademark of Standard & Poor's Corporation.
Standard Deviation: The measurement of the average difference between a portfolio's periodic returns and a benchmark index. The smaller the difference, the lower the standard deviation and the more stability in price movements.
Statement of Additional Information (SAI): An addendum to a mutual fund's prospectus that includes further disclosure about the fund's operations.
Statement of Intention (SOI): A way for a shareholder to qualify for a reduced sales charge by promising to invest a certain amount within a specified time.
Stock Index Future: A futures contract linked to the cash value of a stock index such as Standard & Poor's 500 Index. Allows an investor to invest in the market, rather than individual stocks, to hedge against market declines or to speculate on a market rally.
Stock Split: An increase in the number of outstanding shares of a stock or mutual fund with a corresponding adjustment in the share price. A stock split has no effect on the market value or the value of the owner's shares. For example, if a stock selling for $100 per share splits 2-for-1, a shareholder with 100 shares worth $10,000 before the split would have 200 shares worth $50 per share after the split, with the same $10,000 value.
Stock Power: A form that transfers ownership of a registered security from the owner to another party.
Strangle: An options strategy which is a combination involving a put and a call with different strike prices with the same expiration.
Support: A price level at which declining prices stop falling and move sideways or upward. It is a price level where there is sufficient demand to stop the price from falling.
Synthetic Stock: A strategy using options, it is equivalent to the stock. A long call and a short put is a synthetic long stock. A long put and a short call is a synthetic short stock.
Systematic Investment Plan (SIP): A service option that allows a customer to purchase shares through regular deductions from a bank checking or savings account.
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Tax Deferred: Income whose taxes can be postponed until a later date. Contributions to a 401(k) plan, for example, are not taxed until they are withdrawn from the account, but when withdrawn, they are fully taxed at the applicable tax rate for ordinary income. Withdrawals made from a 401(k) plan before age 591/2 may also be subject to a 10% IRS penalty.
Tax-exempt security: A municipal bond. A security whose current income is not subject to current tax.
Tax loss carryforward: A tax benefit that allows an individual or a mutual fund to offset past losses against future profits. technical analysis Analysis of the supply and demand for securities using charts and graphs to identify price trends that may foretell future price movements.
Theta: A measurement of how much an options price decay's for every one day that passes.
Top-down Approach: investment management strategy in which the investor first looks at general trends in the economy and then chooses specific industries and particular companies that will benefit from these broad trends.
Total Return: The return on investment which takes into account the change in price plus dividends or interest received. The total return for a fund reflects changes in net asset value and reinvestment of all distributions in additional shares of the fund.
Trade Date: The date used to determine the price of a transaction.
Transfer Agent: An institution, usually a bank, used by an issuer of shares to maintain its shareholder records and perform all account transactions.
Treasury bill, bond, note: Negotiable debt obligations issued by the U.S. government and backed by its full faith and credit. Treasury bills are short-term securities with maturities of one year or less. Treasury notes are intermediate-term securities with maturities of 1 to 10 years. Treasury bonds are long-term securities with maturities of 10 years longer.
Trending Market: Price moves in a single direction and usually closing on an extreme for the day.
Trendline: Constructed by connecting a series of descending peaks or ascending troughs to show the trend of the market. The more times a trendline has been touched increases the significance of any break in the trendline. It can act as a support or resistance level as well.
Trust: A legal arrangement under which an individual (trustor) gives fiduciary control of property to a person or institution (trustee) for the benefit of a beneficiary.
Trustee: An organization or individual that serves as the fiduciary for one or more individual accounts, usually acting in conjunction with a commercial bank. The trustee is authorized to act on behalf of the accounts.
Turnaround: A sharp, positive reversal in the performance of a company, industry, or the entire economy.
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Uncovered Option: Also referred to as a naked option, the investor writes an option without owning the underlying security. It is a position with large risk.
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Value Investing: Investing in companies whose stocks appear to be undervalued by the market at large.
Variable Ratio Write: An options strategy in which an investor writes 2 or more options contracts for every 100 shares owned. Each option has a different strike price.
Vega: A measurement of how much an options price changes for a 1% change in volatility.
Vertical Spread: An options strategy in which the options have different strike prices but the same expiration dates.
Volatility: The measurement of how much an underlying security fluctuates over a period of time.
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Warrant: A long term security which is similar to an option. A stock warrant usually allows a trader to purchase one share of stock at a fixed price for a certain period of time.
Wash Sale: The sale and repurchase of the same asset within 30 days. The IRS does not allow an investor to claim a tax loss on a wash sale.
Write: To sell an option. The person who sells the option is considered to be the writer.
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x: Appears next to a mutual fund's listing in the newspaper to indicate that the fund recently paid a capital gain or dividend. This amount was previously included in the fund's net asset value and is deducted from the net asset value when it is paid out. The "x" stands for "ex-dividend."
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Yield: The rate at which a security distributes income, expressed as a percentage of the current price. For example, if a fund distributes $1 per share over the year and at the end of the year the price is $20, its yield is $1/$20, or 5%. Yield is an important measure of performance for income funds and individual bonds.
Yield Curve: A graph depicting the relationship between yields and maturity dates for a set of similar securities. These curves are in constant flux, and one of the key activities in managing any income-oriented mutual fund is to study trends reflected by comparative yield curves.
Yield Spread: The variation between yields on different types of debt securities; generally a function of supply and demand, credit quality, and expected interest-rate fluctuations. Treasury bonds, for example, because they are so safe, will normally yield less than corporate bonds. Yields may also differ on similar securities with different maturities. Long-term debt, for example, carries more risk of market changes and issuer defaults than shorter-term debt and thus usually yields more.
Yield to Maturity: The annual return on a bond, assuming the bond is held until its maturity date. Unlike current yield, this takes into consideration the purchase price, redemption value, time to maturity, coupon yield, and time between interest payments.
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z: Appears after a fund or stock's name in the daily newspaper if the price isn't available in time to meet the NASDAQ reporting deadline, usually due to an extremely tight reporting schedule.
Zero Coupon Bond: A security that pays no interest but is instead sold at a deep discount from face value. The holder receives the rate of return through the gradual appreciation of the security, which is redeemed at maturity for the full face value. Usually trades on a completely present value basis.

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Investment Glossary

Investment Glossary