Glossary of trading terminology
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Aggressive- An investment strategy with an above-average risk tolerance, with the expectation of above-average returns. Aggressive strategies usually favor the purchase of stocks of rapidly growing companies, buying on margin, and options trading.
Buy and Hold - An investment strategy in which stocks are bought and then held for a long period of time, regardless of the market's fluctuations. This strategy is based on the assumption that in the very long term (10-20 years), stock prices will go up and the market as a whole will rise despite any short-term fluctuations due to business cycles or rising inflation. Trade commissions are reduced by buying and selling less often and taxes are often reduced or deferred by holding positions longer.
BUY AT OPEN - If you'd like to implement this type of trading order, then you should place a market order before the market opens up for trading (9:30 AM EST). When placing a market order, your trade will be filled at whatever the opening price is on that morning.
Capital gain- The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is the profit resulting from the sale of an investment. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold. Capital gains generally receive more favorable tax treatment than ordinary gains. Depending on your tax bracket and on how long you held a capital asset, you may pay about one-third to one-half less tax on a capital gain than you would have paid on the same amount of ordinary income.
Capital loss- The loss that results from the sale of a capital asset. Ordinary income can be offset with capital losses up to a maximum of $3,000 per year and excess capital losses can be carried forward indefinitely until exhausted.
Close a Position -To end an investment. Closing a long position requires selling, and closing a short position requires buying.
Conservative - A cautious, risk-averse investment strategy. The preservation of capital is a high priority to a conservative investor.
Cover- To repurchase a previously sold contract.
Current Market Value -The present worth of a portfolio of securities at current market prices.
Day Trader - A very active stock trader who buys and sells the same security very quickly, executes a large number of trades each day, and generally closes all positions at the end of each trading day.
Diversification- A portfolio strategy focused on reducing exposure to risk by combining a variety of investments which are unlikely to all move in the same direction. Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions. A diversified portfolio may contain stocks, bonds and real estate.
Equity- Ownership interest in a corporation in the form of common stock or preferred stock. It can also be expressed as total assets minus total liabilities, referred to as "shareholder's equity", "net worth" or "book value". In the context of a futures trading account, it is the value of the securities in the account, assuming that the account is liquidated at the going price. In the context of a brokerage account, it is the net value of the account (the value of securities in the account less any margin requirements).
Fundamental Analysis -A method used to evaluate the value of a security, by which an investor would carefully examine the company's financial and operations, particularly sales, earnings, growth potential, assets, debt, management, products, and competition figures. Fundamental analysis considers variables that are directly related to the company itself, whereas technical analysis considers the overall state of the market.
Growth Strategy -A strategy based on investing in companies which are growing faster than others in the same industry, with the goal of generating capital gains rather than dividends.
Hedge funds- A fund which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Used generally by wealthy individuals and institutions, hedge funds are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts (ranging anywhere from $250,000 to over $1 million). Investors in hedge funds pay a management fee as well as a percentage of the profits (usually 20%).
IRA (Individual Retirement Account) -A tax-deferred retirement account for an individual that permits the individual to set aside up to $2,000 per year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or later.IRAs can be established at a bank, mutual fund, or brokerage. Only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make deductible contributions to an IRA. All others can make contributions to an IRA on a non-deductible basis. Such contributions qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn.
Long-Term - A long period of time, or for a buy and hold investment strategy.
LIMIT ORDER - A limit order states the maximum price you are willing to pay for a stock. You can use this type of order to avoid entering a position if a stock gaps up or down at the opening and you want to avoid entering at an extreme price. Limit orders can be combined with "buy" or "sell on stop" orders as well.
LONG POSITION - When you buy a stock from the long side, you are purchasing the shares with the hope that they will rise in price. This is the exact opposite of a short sale.
Margin Account -A sophisticated customer account at a brokerage firm which allows an investor to buy securities with money borrowed from the broker. Margin accounts generally offer low interest rates on margin loans to encourage investors to buy on margin. The Federal Reserve limits margin borrowing to at most 50% of the amount invested, but some brokerages have even stricter requirements.
Money Management -The process of managing money, including investments, budgeting, banking, and taxes.
Open a Position -To open an investment. Opening a long position requires buying, and opening a short position requires selling.
Overbought/Oversold Indicator -A technical analysis tool that attempts to define when prices have moved too far and fast in either direction. This indicator is calculated based on a moving average of the difference between the number of advancing and declining issues over a certain period of time. The analyst will sell if the market is considered overbought, and vice versa.
Risk Management - The process of analyzing exposure to risk and determining how to best handle such exposure.
Risk Tolerance -An investor's ability to handle declines in the value of his/her portfolio.
S&P 500 - Standard & Poor's 500. A basket of 500 stocks that are considered to be widely held. The S&P 500 index is weighted by market value, and its performance is thought to be representative of the stock market as a whole (over 70% of all U.S. equity is tracked by the S&P 500). The index selects its companies based upon their market size, liquidity, and sector. Most of the companies in the index are solid mid cap or large cap corporations. Most experts consider the S&P 500 one of the best benchmarks available to judge overall U.S. market performance.
Short - The state of having sold a stock short without having covered it (repurchased a previously sold contract).
Short Selling - Borrowing a security or commodity futures contract from a broker and selling it, with the understanding that it must later be bought back and returned to the broker. Short selling is a technique used by investors who try to profit from the falling price of a stock. The investor's broker will borrow the shares from someone who owns them with the promise that the investor will return them later. The investor immediately sells the borrowed shares at the current market price. If the price of the shares drops, he/she "covers the short position" by buying back the shares, and his/her broker returns them to the lender. The profit is the difference between the price at which the stock was sold and the cost to buy it back, minus commissions and expenses for borrowing the stock. But if the price of the shares increases, the potential losses are unlimited.
Spread - The difference between the current bid and the current ask (in over-the-counter trading) or offered (in exchange trading) of a given security .SP500 or S&P500- The S&P 500 is one of the most commonly used benchmarks for the overall U.S.stock market. The (DJIA) Dow Jones Industrial Average was at one time the most renowned index for American stocks, but because the DJIA contains only 30 companies, most agree that the S&P 500 is a better representation of the U.S. market. In fact, to many it is the definition of the market. When you hear on the evening news that "the market was up today", the reporter is likely referring to a rise in the S&P 500. Companies included in the index are selected by the S&P Index Committee, which is a team of analysts and economists at Standard and Poor's. The S&P 500 is a market-value weighted index, which means each stock's weight in the index is proportionate to its market value.
Technical Analysis -A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future market trends. Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Technical analysis assumes that market psychology influences trading in a way that enables predicting when a stock will rise or fall. For that reason, many technical analysts are also market timers, who believe that technical analysis can be applied just as easily to the market as a whole as to an individual stock. Unlike fundamental analysis, the intrinsic value of the security is not considered.
Ticker Symbol - A system of letters used to uniquely identify a stock or mutual fund. Symbols with up to three letters are used for stocks which are listed and trade on an exchange. Symbols with four letters are used for NASDAQ stocks. Symbols with five letters are used for NASDAQ stocks other than single issues of common stock. Symbols with five letters ending in X are used for mutual funds.
Volatility - The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.
Volume - The number of shares, bonds or contracts traded during a given period, for a security or an entire exchange.