Appendix B
Glossary
Actively managed mutual funds Open-ended funds that employ a portfolio manger who buys and sells stocks and bonds in an attempt to post a better return than the market. Usually represented by some stock index, such as the S&P 500.
Ask The price at which a market maker is willing to sell the security.
Away from the market A phrase that means the bid or the ask price on a stock is not the best order available at that moment. There are lower bids or higher asks currently available.
Ax A market term for the main market maker for a Nasdaq stock. The market maker is responsible for creating an orderly market for a stock and must be willing to either buy or sell the stock if needed. You usually get the best prices from the ax.
Back testing A process of running a trading system through sets of historical market data to see how the system would perform. It can be helpful when used objectively, but it can also be manipulated by commercial providers to elicit the results they want.
Baseline A price that a stock has been trading at recently. It is often a short period moving average. It gives the swing trader a reference point for gauging when a stock may be moving up or down at the beginning of a swing.
Bid The price a market maker is willing to pay for a security.
Breakouts Strong divergences for existing price trends. They signal a new and powerful direction for the stock. The direction may be bullish or bearish and will continue until it runs out of energy.
Buy-and-hold investing A strategy that says investor success is a result of identifying quality investments and holding them rather than actively trading in and out of the market.
Buy to cover An order you can execute that will buy an equal number of shares of the stock you shorted. Buy to cover is often a simple click of the mouse on an advanced trading system.
Channel The price zone between resistance and support that a stock will trade in. Depending on the stock, that zone can be wide or narrow. If a stock breaks above the channel, that’s a bull signal, and if it falls below the channel, it’s a bear signal.
Consolidation When a stock trades in a narrow price range without any clear direction from buyers or sellers. The active trader has profit opportunities when the stock breaks resistance or support as the volatility usually increases markedly.
Contrarian strategies Strategies that are opposite what the market is doing. If prices are trending up, the contrarian shorts. If prices are dipping, the contrarian buys.
Crossovers When an indicator crosses a major marker such as a moving average or a price trend. Can signal a buy or sell situation.
Derivatives Securities that are based on other investment products. For example, stock options are based on the underlying common stock, so the option’s value, in part, is tied to the value of the stock.
Discount brokers Brokers who focus on quick trades and straightforward execution. They offer their services for much less than full-service brokers, but don’t provide personal advice or research.
Divergence When an indicator moves away from or in the opposite direction of a price trend. This usually signals a reversal of the trend.
Diversification The reduction of risk by spreading investment dollars over numerous stocks and/or bonds to minimize the impact should one of the investments turn bad.
Dividends Cash payments (usually, but not always) to shareholders by companies. Dividends are a distribution of profits to the owners. Companies that pay regular dividends are valued for that extra return they provide shareholders.
Dollar cost averaging Investing a fixed amount on a regular basis in a mutual fund, usually monthly and through an automatic debit to your bank account. This investment method means you buy fewer shares when prices are high and more shares when prices are lower, resulting in an overall lower average cost.
E-Mini Stock Index Futures or e-minis An electronically traded futures contract. The e-minis are a smaller size than normal future contracts and are issued on stock indexes such as the S&P 500, Dow, and so on.
Earnings A word that can have several meanings when used to describe accounting activity. However, it generally means profits when used without a modifying term to describe some other function.
Earnings per share (EPS) A way of reporting earnings or profits on a per share of stock. The number is found by dividing the annual earnings by the number of shares.
Emergency cash reserve A ready supply of cash in bank products or a money market mutual fund that you can tap in a hurry in the event of an emergency such as the loss of a job, a big uninsured medical expense, or some other financial crisis. You should have enough to keep your household running for six months.
Exchange Traded Funds (ETFs) Funds that are similar to mutual funds in that they are baskets of stocks or bonds, but they are traded on the open market like stocks.
Gap A term used to describe a jump (up or down) in price from the closing price to the next day’s opening price. Gaps also occur during intraday trading when prices skip up or down. Several factors, both good and bad, can cause a gap. Gaps are warning signs to active traders to pay attention.
Growth stocks Stocks that represent companies that are growing at a faster pace than the market in general. They often plow profits, if any, back into the company to finance more growth. Investors count on continued growth to keep stock prices increasing. If the company stops growing, even for a quarter, the stock market may lose confidence in the company and the stock’s price can plummet.
Intraday price The price quote of a security during active trading. It is neither the opening nor closing price and will change many times in the course of the trading day.
Leverage The use of borrowed money to increase your purchasing power. If the value of the asset rises, your return on investment increases dramatically. If the asset loses value, the borrowed money that must be repaid magnifies your loss.
Liquidity The relative ease at which a trader or investor can buy or sell a security. Stocks are highly liquid because there is a ready market for them. Real estate is not liquid because it may take months to find a buyer.
Margin The ability to borrow against the value of a security to extend your investment capital. Margin accounts with brokerage firms usually let you borrow up to 50 percent of the account value for a reasonable interest rate. Short-term traders may have higher limits on margin accounts.
Market capitalization or market cap Calculated by multiplying all of a company’s outstanding shares (those shares available for trade on the stock exchanges) by the current per share price.
Market makers Broker dealer firms that make a market for a particular stock by holding a certain number of shares in inventory. They display bid and ask quotes—offering to buy or sell the stock. The Nasdaq has more than 500 market marker firms that keep the exchange working.
Penny stocks Generally stocks of very small companies that trade outside established exchanges. They may sell for several dollars per share and are considered very speculative.
Retail stockbrokers Stockbrokers who provide general brokerage services to non-professional investors and traders. Retail brokers can adequately serve the majority of people who invest or trade. Advanced trading platforms provide sophisticated services for professional traders and investors.
Securities and Exchange Commission (SEC) The main regulatory agency responsible for monitoring the stock markets and the securities industry. It must approve all IPOs and requires frequent and regular filings from publicly traded companies. It is a watchdog for investors to protect them against unethical investing practices.
Short position In futures trading means you have sold a contract anticipating its value was going to decline. Unlike shorting stocks, you don’t have to borrow a contract from your broker and there are no restrictions on buying or selling short contracts.
Short selling A trading strategy that seeks to profit when the price of a stock falls. Traders “borrow” shares from their broker and sell them. When the price drops, traders buys the shares back at the lower price and returns them to their broker. The difference between selling high and buying low is profit.
Slippage The difference in the bid-ask spread from the time a trader enters an order to the time it gets filled. Another form of slippage involves the market maker upsetting the applecart with a change in price to take advantage of an upcoming market order.
Specialist An employee of a member firm of the NYSE. This investment professional is responsible for maintaining a market in a particular stock. The specialist matches buy and sell orders, but if the market gets out of balance, may step in and buy or sell out of the company’s account to regain balance.
Stock indexes Baskets of stocks designed to represent all or certain segments of the market. Most financial professionals consider the S&P 500 index representative of the market, while the Dow is still the best known.
Stop-loss orders Orders that tell your stockbroker to execute a sell order when the price of a stock drops to a specific level. When the price falls to this level, the broker sells the stock at the current market price. This strategy prevents you from losing more than a specific amount.
Spread The term that describes the difference between the bid and ask price. It is also used to describe other financial arrangements where there is a difference in price or interest rates. The difference or gap is the spread.
Trailing stops Stops that are similar to stop-loss orders. However, they are used by investors to protect a profit. Investors place a trailing stop behind a profitable stock so that if the price begins to fall, the broker will sell while the price will still produce a profit. If the stock continues to rise, the trailing stop rises with the stock’s price, usually followed by a percentage.
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