Trading Glossary

A-D
Advance-Decline, or measurement of the number of issues Trading above their previous closing prices less the number trading below their previous closing prices over a particular period. As a technical measure of Market breadth, the steepness of the AD line indicates whether a strong Bull or Bear market is under way.

Abandonment
Controlling party giving Up rights to property voluntarily.

Abandonment option
The option of terminating an Investment earlier than originally planned.

Bar Chart
A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates the highest price a security traded at during the day, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar, and the opening price is shown on the left side of the bar. A single bar like the one below represents one day of trading

Average Daily Trading Volume - ADTV
The average amount of individual securities traded in a day or over a specified amount of time. Trading activity relates to the liquidity of a security; therefore, when average daily trading volume is high, the stock can be easily traded and has high liquidity. As a result, average daily trading volume can have an effect on the price of the security. If trading volume isn't very high, the security will tend to be less expensive because people are not as willing to buy it.

Breakout
A price movement through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Traders will buy the underlying asset when the price breaks above a level of resistance and sell when it breaks below support.

Bullet Trade
This is a strategy commonly used by investors that wish to capitalize on a falling market. Due to short sale rules by different exchanges, investors may be delayed in shorting a position because of continuously declining markets. An immediate alternative for creating the short strategy is to buy a put option.

Technical Analysis
Technical analysts believe that the historical performance of stocks and markets are indications of future performance.

In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.

Fundamental Analysis
Fundamental analysis is about using real data to evaluate a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security.

For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy, and information about the bond issuer, such as potential changes in credit ratings. For assessing stocks, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of a the company being evaluated.

One of the most famous and successful users of fundamental analysis is the Oracle of Omaha, Warren Buffett, who has been well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.

Stock Idea
The main thing to remember when you hear a stock idea is to approach it as objectively as possible and to look at the positives and negatives along with the potential risks. Too often, an investor will take a position on a security based on what someone else said, rather than performing his or her own analysis of the company.

There is no substitute for doing your own homework on a particular firm, and you should never substitute someone else's judgment for your own.

Noise Trader
The term used to describe an investor who makes decisions regarding buy and sell trades without the use of fundamental data.These investors generally have poor timing, follow trends, and over-react to good and bad news.

A hotly debated issue in behavioral finance, many investors feel that they're not noise traders and, therefore, only make well informed investment decisions.

In reality, most people are considered to be noise traders, as very few actually make investment decisions solely using fundamental analysis. Furthermore, technical analysis is considered to be a part of noise trading because the data is unrelated to the fundamentals of a company.

Retail Investor
Individual investors who buy and sell securities for their personal account, and not for another company or organization.

Also known as an "individual investor" or "small investor".

Retail investors buy in much smaller quantities than larger institutional investors.

Block Trade
An order/trade submitted for sale or purchase of a large quantity of securities. Also known as "Block Order".

In general, 10,000 shares of stock (not including penny stocks) or $200,000 worth of bonds would be considered a block trade.

Market Overhang
An observational theory stating that in certain stocks at certain times, there is a buildup of selling pressure. This occurs as a combined result of sales and a strong wish to sell among those who still hold the stock but fear that selling it may cause further declines. Depending on the overall liquidity in the stock, a market overhang can last for weeks, months or longer. Market overhang usually relates to trading in one security but can also apply to larger areas of the market, such as an entire sector.

Market overhang is most often felt and created by institutional investors, who may have a large block of shares they wish to sell and are aware of high selling interest across the market for the stock. Another scenario arises when a large shareholder is thought to be looking at selling his or her stake. This creates an overhang in the stock, which prevents investors from buying the stock until the large shareholder is done selling his stake. Market overhang can also develop in a poorly-performing IPO when the lockup period ends and insiders look to unload their recently-acquired shares

Majority Shareholder
person or conglomerate who owns more than 50% of the outstanding shares of a corporation

Owning that much of a corporation gives an entity a huge amount of control. The majority shareholder is often the founder of the corporation.

American Depositary Receipt - ADR
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction

This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq.

Blue-Chip Stock
Stock of a well-established and financially sound company that has demonstrated its ability to pay dividends in both good and bad times.

Large Cap (Big Cap)
An abbreviation for the term "large market capitalization". Market capitalization is calculated by multiplying the number of a company's shares outstanding by its stock price per share. The expression "large cap" is used by the investment community as an indicator of a company's size. For example, a large-cap stock would be from a company with a market-capitalization dollar value of over $10 billion.

Mid Cap
A company with a market capitalization between $2 and $10 billion, which is calculated by multiplying the number of a company''''s shares outstanding by its stock price. Mid cap is an abbreviation for the term "middle capitalization

As the name implies, a mid cap company is in the middle of the pack between large cap and small cap companies.

Keep in mind that classifications such as large cap, mid cap and small cap are only approximations that change over time. Also, the exact definition of these terms can vary among the various participants in the investment business

Small Cap
Refers to stocks with a relatively small market capitalization. The definition of small cap can vary among brokerages, but generally it is a company with a market capitalization of between $300 million and $2 billion.

One of the biggest advantages of investing in small-cap stocks is the opportunity to beat institutional investors. Because mutual funds have restrictions that limit them from buying large portions of any one issuer's outstanding shares, some mutual funds would not be able to give the small cap a meaningful position in the fund. To overcome these limitations, the fund would usually have to file with the SEC, which means tipping its hand and inflating the previously attractive price.

Keep in mind that classifications such as "large cap" or "small cap" are only approximations that change over time. Also, the exact definition can vary between brokerage houses.

Market Capitalization
The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determining a company's size, as opposed to sales or total asset figures.

Frequently referred to as "market cap".

Outstanding Shares
Stock currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. Shares that have been repurchased by the company are not considered outstanding stock.

Also referred to as "issued and outstanding" if all repurchased shares have been retired.

This number is shown on a company's balance sheet under the heading "Capital Stock" and is more important than the authorized shares or float. It is used to calculate many metrics, including market capitalization and earnings per share (EPS).

Liquidity
1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity.

2. The ability to convert an asset to cash quickly. Also known as "marketability".

3. It is safer to invest in liquid assets than illiquid ones because it is easier for you to get your money out of the investment.

4. Examples of assets that are easily converted into cash include blue chip and money market securities.

Buy back
The purchase by a listed company of its own shares either in the open market or by tender offers. Companies do it for five reasons:

to increase the share price
to rationalise the capital structure - the company believes it can sustain a higher debt-equity ratio
to substitute the dividend payouts with share repurchases (because capital gains may be taxed at lower rate than dividend income)
to prevent the dilution of earnings caused, for example, by the issue of new shares to meet the exercise of stock option grants
to deploy excess cash flow and return it to shareholders

Dividend Yield
The dividend yield is calculated by dividing the dividend by the current stock price. The yield moves inversely to price, so the higher the per share price - the lower the dividend yield. A high dividend yield may signal an under priced stock, while a low dividend yield may indicate an over priced stock.

Crash of 1987
October 19, 1987, the day on which the DJIA fell 508 points (22%). also called Black Monday.