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Dictionary of Stock Market Terms by Alphabet

401 (k) Plan

401 k plans represent a type of a retirement plan that is offered by almost all employers to their employees. If you participate in such a plan you are allowed to make monthly contributions from your salary. The good thing about such retirement plans is that the contributions are invested in a plan, which provides you with returns.

The contributions you make are pre-tax. Therefore, you enjoy a lower income tax. The plan usually includes different mutual funds to which employees can allocate their money.

An increasing number of employers have started to provide matching of contributions. Another benefit of 401k plans is that deposits and earnings made are deferred from taxes until you decide to withdraw the money from the account.

403 (b) Plan

403 (b) plans are a type of a retirement plan that carries most of the characteristics of 401k plans. However, they differ from the latter since they are generally for religious, educational and other groups, which are defined as non profit. The investments in 403 b plans are annuities. Thus, 403b plans are often referred to as annuity plans. The contributions to 403b plans are deferred from taxes until you withdraw money from the account.

529 Plan

529 plans or qualified tuition plans are a form of tax-advantaged college savings plan. They are named after section 529 of the Internal Revenue Code.

529 plans are usually state-sponsored. However, universities and educational institutions may also form groups and sponsor their own 529 plans. The one who acquires the plan is called the donor, and the student that would use the saved funds or prepaid tuition credits is called the beneficiary.

529 plans may be sold directly by the state or the sponsoring group. However, they may also be obtained through brokers. In the case of the latter, you usually have to pay additional fees to cover the broker's commission (the sales load).

Annual Report

By law all companies that are traded publicly are required to issue an annual report. The SEC requires the issuance of such a report each year and it should be provided to all the shareholders. The annual report includes information on the financial results the company has achieved throughout the fiscal year.

Many companies use annual reports as a way to state the positive results that have been achieved by the company's management team. As a result, you can often find information on problems that have been experienced by the company in the footnotes.

In order to guarantee for the validity of the annual report an accredited accounting firm examines the report. If the report corresponds to the actual condition of the company the accounting form certifies the validity of the annual report.

Asset Allocation

When you establish your investment portfolio it is important to make the appropriate asset allocation. The latter represents the distribution of the assets you have available for investing in such a way that it is consistent with the financial goals you have predetermined. Asset allocation is usually done by allocating different proportions among stocks, bonds and cash.

Baby Boomers

Baby Boomers are the people that were born between the years 1946 and 1964. Their number is usually estimated to be around 76 million. This group of people combined has an outstanding reserve of buying and investing resources. As a result, many specialists give voice to the concern that the retirement of this group of people will have a profound impact on the economic conditions. Additionally, this will lead to deep social changes.

Balance Sheet

The balance sheet is an obligatory element of every company's annual report. It includes information on a company's:

  • Assets
  • Liabilities
  • Equity
  • Net worth

These are tied to a particular time period. By referring to the balance sheet you can find out what is the real value of a company.

Avoid falling in the common mistake of referring to the balance sheet as the bottom-line. The latter is found in the income statement of the company and has no place in its balance sheet.

Balanced Investment Strategy

When you establish your investment plan you should include considerations about the strategy you will follow in order to achieve you financial goals. The balanced investment strategy represents one of the strategies you can follow. It includes the asset allocation among investments that bring both income and growth. Many investors prefer this strategy since they hope that a fall in one of the investments will be compensated by an increase in the other.

Basis Point

Generally the value of a basis point is equal to one hundredth of a percent. This means that one percent is equal to 100 basis points. You often hear such statements in the media that the Fed has increased a particular rate by a certain number of basis points.

1 basis point = 1/100 of 1%

1% = 100 basis points

Bear Market

Often times the stock market experiences continuing decline. This condition is commonly referred to a bear market. The decline should be characterized as of being of a long-term nature (usually two quarters). You can identify a bear market by studying the different market indicators. If there is a consistent fall in them, then the market is probably bearing.

Bellwether

Bellwether stocks are generally viewed as an indicator of overall market or sector direction. The term bellwether itself is used to describe a company that is recognized as the leader in its industry. Since bellwether stocks are perceived as indicators of market trends, when a bellwether stock goes up or down in price, the entire sector of this stock may move in the same direction.

Microsoft, for instance, is a bellwether stock in the computer software sector. Other bellwether companies are Wal-Mart, Intel, General Electric, McDonald's, etc.

Beta

Volatility of a particular stock is measured by what is commonly called beta. Since stocks are characterized by their dynamic nature in terms of rising and falling prices, knowing how volatile a stock is will be extremely valuable. Such knowledge will facilitate your decision making in terms of knowing when to sell and buy a stock.

The higher the value of the beta, the higher the volatility of the stock is. If the value of beta is of a low amount than the corresponding increases and decreases in the price of the stock are also of a low value. However, if the economic conditions are unfavorable, then it will be good for the beta to be of a lower amount. On the other hand, if the market is experiencing an upward movement, then a high beta will be beneficial for the investor.

Beta changes are triggered by changes in the future prospects of the company. Therefore, beta figures can be used to judge the future trends in the price of the stock.

Blue Chip Stock

The companies that are regarded as being one of the most prestigious and stable in the stock market are commonly referred to as blue chip stocks. Such companies have shown consistent earnings and usually have long-term growth potential.

Interesting fact: Blue was the color of the wagering chip with the highest value. It is believed that the name comes from there and that the stocks the term is actually referring to are considered to be "safe and winning bets."

Bull Market

Often times the stock market experiences continuing rise. This condition is commonly referred to a bull market. In order to determine whether the market is under such conditions you should study the market indicators. If they show significant growth in the value of the stocks over the long term, then the market can be defined as a bull market. The latter is usually characterized by having fewer sellers than buyers.

Business Cycle

The economy is characterized by undergoing different business cycles. The latter represent ups and downs that are experienced over the long-term. The cycle usually goes on the following path: recession - recovery - recession - recovery - and so on...

Being an educated investor, you should be able to notice when the economy is moving from one cycle to the other.

Buy and Hold Strategy

Opposite to short-term trading, the buy and hold investment strategy if applied calls for the making of long-term investments. The focus of this investment strategy is on quality investments that have a high potential for growth.

This strategy requires the investor to exercise the appropriate investment discipline and try to avoid making frequent trades.

CANSLIM

CANSLIM investing carries some of the features of momentum investing with some further added to it. It was developed by William J. O'Neil and in his book "How to Make Money in Stocks". It represents a method of observing, buying and selling common stocks.

More than 500 stocks were picked by O'Neil through the use of a computer database. This was done over the period between 1953 and 1993. After making a thorough analysis of these stocks, O'Neil managed to identify seven characteristics that all of these stocks share. These traits are synthesized by the acronym CANSLIM.

Every criterion against which an investor should evaluate a stock is represented by a letter of the acronym. So, here are the seven common traits found by O'Neil:

C Current Quarterly Earnings per Share It is desirable that a major increase over the past year's same quarter is observed.
A Annual Earnings It is desirable that the company has an increase in its annual earnings over the past five years.
N New products, New management, New prices of higher level
S Supply and Demand Companies should be of a small market cap character and have high trading volume levels.
L Leader in the industry in which the company operates
I Institutional Sponsorship Even small amount can make a difference.
M Market Direction The trend should be of an upward character.

Capital Gain

Generally, capital gain represents the profits you get when you sell a particular investment. Basically, there are two types of capital gain: short-term and long-term.

Short-term capital gain is acquired when you sell a stock you have held for less than a year. Such short-term capital gain is subject to a tax level that is usual for the ordinary income of the holder of the stock.

Long-term capital gain is acquired when you sell a stock you have held for more than a year. In such a case the holder of the stock is liable to 20% tax.

Capital Preservation Strategy

When you start investing in stocks you should determine the investing strategy you will follow. One of the strategies you can pick is commonly referred to as capital preservation. If you select it, this means that you are more concerned for preserving your capital than making huge returns. This investment strategy is characterized as being extremely conservative. Capital preservation is usually preferred by investors who intend to leave their assets to their generation.

Class A Stock

The stock that is issued for the purposes of being publicly traded from an IPO is commonly referred to as a Class A Stock. Additionally, some companies decide to issue stocks at a later point in time, so such stocks are also classified as Class A.

Class B Stock

The owners of a company have the right to retain stocks when the company goes public. These stocks are referred to as Class B Stocks. Therefore, such stocks give their holders different rights from which the general public is deprived. For example, the holders of Class B stocks have 10 votes for each share they posses. On the other hand, the shares that are traded publicly carry just one vote.

Coincident Economic Indicator

If you want to find information on the current conditions of the economy you should refer to one of the coincident indicators. The latter makes an accurate assessment of the changes that are taking place while they are occurring.

An example of a coincident economic indicator is the value of personal income.

Collateralized Debt Obligation (CDO)

Collateralized debt obligations (CDOs) are investment-grade securities that are backed by a pool of various other securities, such as bonds, loans and other assets. They are called collateralized since there is some type of collateral behind them.

CDOs represent different types of debt and credit risk. They are divided by the issuer into different tranches (or slices) and each tranche has a different maturity and risk that is associated with it: senior tranches (rated AAA in terms of safety), mezzanine tranches (rated AA to BB), and equity tranches.

Since losses are applied in reverse order of seniority (in other words from the highest risk tranches to lowest) the most highly rated tranche, the senior tranche, is protected by the subordinated structure. The equity tranche on the other hand remains most vulnerable and is often referred to as "first-loss tranche" or "toxic waste". Therefore, it offers higher interest rates in order to compensate for the added default risk.

The issuer of the CDO gets a commission when the CDO is issued and management fees during the CDO's life. This is how a CDO differentiates from a mortgage or mortgage-backed securities (MBS); the investment in a CDO is not a direct investment in the particular collateral but rather an investment in the cash flows produced by the CDO's assets.

One of the positive sides of CDOs is that they provide more liquidity in the economy by allowing banks and corporations to sell off debt. This in return helps them free up more capital.

Yet, a downside is that CDOs allow originators of the loans to avoid collecting on them when they become due since other investors are already owners of those loans. As a result this loosens the lending standards.

Additionally, creating CDOs from other CDOs allows large financial institutions to hide their debt and losses by pooling their debt with other financial institutions in order to move it off their books and then bringing it back onto their books as the so called Synthetic CDO asset.

Due to the complexity and lack of transparency of the CDOs, many buyers do not really understand what they are buying and rely solely on the trust of the institution that is selling the CDO. This causes market panic when sellers lose the trust in the product and makes CDOs difficult to resell, which is one of the causes for the banking liquidity crisis in 2007.

Collateralized Mortgage Obligation (CMO)

A Collateralized Mortgage Obligation (CMO) is type of mortgage-backed security.

It represents a special purpose vehicle (SPV or also known as special purpose entity - SPE) that is completely separate from the institution that has created it and is an owner of a set of mortgages, referred to as a pool.

Investors in CMOs buy bonds issued by the entity. The cash flow from the underlying collateral (the mortgages) is distributed over a series of tranches (also known as classes) with varying maturities and prepayment risks, designed to meet specific investment objectives.

Investors in collateralized mortgage obligations include banks, insurance companies, hedge funds, mutual funds, pension funds, government agencies, and since the recent financial crisis even central banks.

How does a Basic CMO (Sequential CMO) Work?

Each tranche in a CMO differs in the order bondholders receive principal payments. As payments on the underlying mortgage loans are collected, the interest is first paid to the bondholders in each tranche till it is completely paid off. The principal payments on the other hand are paid out first to investors in the first tranches until they are completely paid off. Then investors in the second tranche are paid off followed by investors in the next tranche.

Common Stock

The owners of a company possess common stock. The latter represents the major unit by which ownership in a corporation is recognized. The possession of a common stock gives its holders several rights. One of them is the right to vote on important issues concerning the operations of the company.

On the other hand, owners (also known as shareholders) have limited liability. This means that their liability is equal up to the value of the stock under their possession.

Compounding

One of the tools you can benefit present in most investments is compounding. How it works? When you earn interest on your assets for a particular time period, you gain interest on the principal and the interest you have gained over the next time period. As a result, if you hold the investment over the long-term you will be amazed how far your assets can grow.

Coupon

Initially bonds were issued with a book of coupons. When the investor purchases a bond, s/he gets such a book and is required to send the coupons in order to get the interest that has accumulated over the bond. So, a coupon represents the interest that is paid on a bond. Many people still refer to bond investors as coupon clippers.

Credit Default Swap (CDS)

Credit default swaps (CDS) are insurance-like contracts in which the buyer of the CDS makes certain payments to the seller in exchange for the promise to receive a payoff in the event of a default.

Credit default swaps typically apply to corporate debt, municipal bonds, and mortgage securities, can be bought by any investor even if the buyer does not own the particular credit instrument, and are sold by banks, hedge funds and others.

Consider the following example:

The investor A buys a CDS from the bank B to cover the losses in case the company X defaults. In this case, the investor owns the X company debt. Thus, the investor A starts making regular payments to the bank B and if X defaults on its debt and fails to repay it, the bank B will pay one-off payment to the investor A. At that point the CDS contract is terminated.

When the company X defaults, either the investor A delivers the defaulted asset to the bank B for a payment of the par value (known as physical settlement), or the bank B pays the investor the difference between the par value and the market price of the debt obligation of the X company (known as cash settlement).

However, the investor is not required to own any debt in order to buy CDS. Thus, buying CDS contracts is very often done for speculative purposes. Investor A buys a CDS contract and bets against the solvency of the company X in order to make money if it defaults.

Credit Default Swaps Regulation

Credit default swaps work much like insurance but in contrast to banks and insurance companies, the credit swaps market is not regulated.

CDS can be traded from investor to investor unregulated. No one oversees the trades of CDS and ensures that there are enough resources to cover losses if the particular security defaults.

Current Yield

When you evaluate bonds that represent candidates for investment you should consider their current yield. The latter includes calculations that are based on the current market price of the bond. As a result the current yield may differ from the return you will get since the current market price is usually different from the par value of the bond.

Day Trader

Day trading is usually not recommended since it carries a high degree of risk. Day traders usually trade aggressively by connecting through the Internet with a broker or a terminal that is in turn connected to the office of the broker.

The major goal of day traders by making numerous trade transactions each day is to earn small profits.

Defined Benefit Plan

Generally, there are different types of retirement plans offered by employers. One of them is the so called defined benefit plan. If you select such a retirement plan the ultimate benefit will be in advance.

The benefit that you will get is usually determined by:

  • How many years the employee has been with the company
  • An average of the salaries of the employee over the past three years (the number of years varies from plan to plan).

Defined Contribution Plan

One of the many retirement plans you can choose from is the defined contribution plan. Under its conditions the benefit you will get is not specified. However, as its name implies, the contribution is fixed.

What is considered important by such retirement plans is the amount that is contributed and the persons that make the corresponding contributions. The amount you get when you retire depends on the returns you get throughout the investing process.

Discount Broker

When you start investing you should consider the possibility of using the services of a broker. There are different types of brokers and one of them is the so called discount broker. The latter will greatly facilitate your investing activities, since s/he will assist you in the buying and selling of securities. However, you should not expect from him/her to make recommendations regarding your investment decisions. Discount brokers are usually referred to as order takers. In return to their services they charge a commission fee. However, the amount they will charge you is significantly less than the commission of a full service broker.

An example of a discount broker is online brokers with few exceptions.

Diversification

One of the most important things that you should keep in mind when you construct your investment portfolio is diversification. The latter represents the spreading of investments among various asset classes, such as stocks, bonds, cash and others.

Diversification protects the investor to a great degree from losses. This means that if one investment falls it will be compensated by a rise in another investment. This will happen since usually different asset classes move in a different fashion.

Dividend Yield

In order to determine whether a particular stock is under-priced or over priced you should use dividend yield. The latter is calculated by using the current stock price to divide the dividend. As a result the higher the per share price the lower the dividend yield will be. This shows an inverse relationship between yield and price.

So, if a stock is under priced, then the dividend yield should be high and vice versa - if the dividend yield is low, then the stock is potentially over priced.

Dividend

When you become an owner of a company's stock, the company may pay you the returns in the form of dividend. The latter is usually paid each quarter, but it is up to the board of directors to determine. The board of directors is also responsible for the payment authorization.

Dividends can be paid in variety of forms. Typically, they are paid in cash. Another alternative is the payment of dividends in the form of stocks. Unfortunately, dividends are liable to taxes.

However, you should have in mind that it is up to the company to decide whether to pay dividends or not. An example of a company that will probably not pay you dividends is the one that is experiencing rapid growth. In such a case the company may choose to invest the money back in order to finance its growth.

Dow Jones Industrial Average

There are many stock indexes that are quoted in the media. The most popular one is the Dow Jones Industrial Average (also know as the Dow). As part of the Dow are 30 companies. They represent the leaders in the industries in which they operate. As a result they represent a large portion of the market value. The Dow is the most often used index, even though it does not provide as wide view of the market as other indexes.

Earnings per Share (EPS)

When you decide on the investment in a particular company you can use different tools to compare it with other companies. One of them is the earnings per share (also known as EPS). The latter is calculated by using the number of company's outstanding shares to divide its net revenues. You should keep in mind that it is rare to find companies that have one and the same number of outstanding shares.

Economic Indicator

In order to determine the state of condition of the economy you should refer to one of the many economic indicators. Some of them include prices, wages, unemployment and others.

Economic indicators do have an influence over the prices of stock, which can be either positive or negative.

Equity Based Evaluation

The relationship between the equity of a company and the price of its stock is presented by the equity based evaluation. In order to find the exact value of this relationship when using equity based evaluation you should apply the price-to-book ratios and the return in equity.

Execution

When you start trading with stocks you can use different types of orders issued to your broker for the completion of a trade. When the order is put into action and completed the process is referred to as execution. In order for an execution to be qualified as a good one it should be at the price you have pre-determined and in a quick and timely manner.

Federal Reserve Board

The Federal Reserve Board is the financial entity that stays behind the control of the interest rates. Also known as the Fed, it manages the key rates that in turn have an influence on the market.

If the market doesn't anticipate a change that is implemented by the Fed, its conditions can significantly suffer. Rises and falls of the interest rates have a direct influence on the performance of the stock market.

The person who heads the Fed (chairman of the Federal Reserve Board) is Alan Greenspan. He holds this position for a plenty of years.

Fiscal Year

The accounting year for a company is usually referred to as a fiscal year. The fiscal year for different companies may vary, which means that some of them may not use a calendar year as their fiscal year. However, most companies prefer to use a calendar year for their accounting activities.

Financial operations of the U.S. Government are carried out in a 12-month fiscal year. Thus, the federal government fiscal year runs from Oct. 1 of the prior year through Sept. 30 of the next year.

Fundamental Analysis

When you consider the investment in a particular stock, you can apply different tools to evaluate its viability. One of them is the so called fundamental analysis. It uses key ratios as a measurement basis. The latter are applied in order to get a better view of the target business fundamentals.

Growth Investment Strategy

When you begin investing in stocks you should choose a strategy that will lead your way through your financial goal achievement. One strategy you can apply is the so called growth investment strategy. Under this strategy you select companies that present a high potential for growth. You should be willing and ready to ignore the frequent price fluctuations typical for growth stocks.

Growth Stock

Growth stocks are generally issued by companies that manage to grow their earnings and revenues at a faster rate than the average typical for the industry in which they operate. Unfortunately, growth companies rarely pay dividends, since they need the generated resources for the financing of their further development and growth.

Growth stocks are preferred by investors that foresee that the price of the company's stock will rise in the long-term thanks to its growth.

Growth investors tend to concentrate their efforts in discerning stocks that present good potential for greater growth as compared to the other stocks on the market or to the stocks that are in the same industry. If you manage to develop your growth discerning skills and find such companies, over the long term you will enjoy high profits that are caused by the increase in the value of the company.

Income Investment Strategy

Investors have several investing strategies to choose from. One of them is the income investment strategy. If you apply this strategy, then you will have to look for stocks or bonds that represent a straightforward source of income.

Income Statement

When you study a potential investment candidate you should look at its income statement. The latter represents the amount of money the company has earned or lost during a particular time period. The income statement is usually included in the annual report. Additionally, a company's income statement includes the commonly stated bottom line.

Inflation

One of the threats of your profits is inflation. The latter is defined as a constant increase in the level of consumer prices or a decrease in the purchasing power of money (you can buy fewer things with the money you possess).

As a result of the inflation the prices of the goods and services rise significantly without being accompanied by the corresponding extra value.

Another effect of inflation is increased interest rates. This in turn usually leads to a slow down in the economy. The result of a cooling economy that persists for a long time may be recession, which if persists may result in depression.

Initial Public Offering (IPO)

Initial public offering (also know as IPO) represents the first issuance of a stock by a particular company. This is done when a company decides to offer stocks for public trading.

IPO is subject to different laws and regulations. When a company decides to go public the media immediately directs its attention to it. Thus, hot stocks experience a huge increase in their prices. However, such huge rises are often followed by a huge decrease.

Lagging Economic Indicator

If the economy experiences a change of some character, then in order to measure the consequent changes a lagging indicator is applied. However, lagging indicators doesn't provide a good measure for the future condition of the economy. On the other hand, it is commonly used for establishing a potential trend.

An example of a lagging indicator is unemployment. It is commonly used to see whether companies are expecting any positive or negative change in the economy. As a result, bad expectations of companies usually result in higher unemployment rates.

Leading Economic Indicator

When there are changes in the economic conditions, before they are really observed a leading indicator can be applied in order to make a measurement. As a result many experts use leading indicators to make predictions about the future trends in the economy. However, these estimations are not of great accuracy. Examples of leading indicators include:

  • Building permits
  • Unemployment claims
  • Money supply

Long-Short Investing

The long-short investing strategy involves buying shares of stock in one company and shorting others. This strategy is often implemented by hedge funds. They short a company that is doing the worst and buy shares in a company that is doing well.

The meaning behind long is closely related with buying. For example, when you say go long 200 shares of Microsoft, you mean that you want to purchase shares of Microsoft. On the other hand, the meaning behind short is closely related to selling. For example, when you say short 200 shares of Microsoft, you mean that you want to sell the shares you possess of Microsoft.

Other meanings of long and short are related with your position regarding a stock. The long position concerns the investor's ownership of securities. For example, if you state that you are long 200 Microsoft, then this means that you are the owner of these shares. On the other hand, short position occurs when the investor sells stocks which are "borrowed" and s/he does not yet own. Generally, stock traders create a short position when they expect the price to go down.

Maintenance Margin

When you open an account a minimum amount of equity is required to be kept in it, which is generally referred to as maintenance margin. The level that should be maintained in your account depends from one broker to another. Most brokerages require your maintenance margin to be not less than 25% of the total market value of the securities in the margin account; however many have higher requirements of 30-40%.

Margin

There are many ways in which you can provide financing for your stock investments. One of them is referred to as margin. This method allows your broker to provide you with no more than 50% of the price of the stock.

So, let's say that you have $10,000 for investing. Under margin conditions you can buy stock worth $20,000. When you sell the stock you are required to repay the money your broker has lent you. Interest is owed on the loan.

However, if the price of the stock happens to fall 75% below the price on which you have acquired the stock, your broker has the right to make you sell the stock and give him/her the money you owe on the loan. If you don't want to say goodbye to the stock you can deposit more money in the account.

Margin Call

A margin call is issued by your broker when the value of your account is less than the required maintenance minimum. Your broker may require you to deposit more money in the account in order to return it in balance. On the other hand, your broker has the right to sell securities without your permission.

Market Capitalization

When you decide on the investment in a particular company you should study its market capitalization (also known as market cap). The latter represents a measure of the company's size. In order to estimate it you should use the number of outstanding shares to multiple the current price of the stock. For example, if the price of a particular stock is $30 and there are 200,000,000 outstanding shares, then the market cap of the company will be $6.0 billion.

Market Order

Investors have many tools to use when they stock trade. One of them is a market order. The latter is placed with a broker to buy or sell at the most beneficial price that is present at current. When a market order is placed, the broker is required to execute it first before any other orders.

Market Timing

Investors have many investing strategies to choose from. One of them is market timing. It involves the guessing of the ups and downs of the market and the time when they will be experienced. Market timing represents a short-term strategy, which is not recommended because it doesn't have much success over the long term.

Maturity

The term maturity is usually associated with bonds. It represents the time period before the bondholder receives the par value of the bond s/he possesses. Maturity can be equal to several months, or even years. The par value of the bond is received when the bond reaches maturity.

Mid-cap Stock

Depending on the market capitalization of the company, stocks are classified in different types. If the market cap of a company is between $1 and $8 billion, then the stock is referred to as a mid cap stock.

Minimum Margin

Minimum margin is also known as initial margin or margin requirement. It represents the required minimum amount of money that is needed before actual stock trading can begin. This amount is deposited in the opened account and can be not less than $2,000.

Momentum Investing

Momentum investing includes the purchase of stocks that experience significant speeds in their price increase. Momentum investors base their investment on the tactic of holding a stock until its price continues to rise. Once the price starts to fall, investors will sell the price.

The earnings that the company generates and its price are the major measures on the momentum of the stock. The basic aspect underlying momentum investing concerns the targeting of stocks that have experienced highest price changes over the most recent months. Momentum investors assume that such companies will continue to generate profits and for the moths to come.

Companies that experience high growth in their returns are also in the focus of momentum investors.

However, momentum investing comes with its risk. Namely, momentum stocks are generally in the focus of most investors. This means that the price of the stocks and the P/E may be already high, which leads to your inability to purchase them cheap. The price will quickly fall when a small decrease in the earnings is experienced.

Mortgage-Backed Security (MBS)

A mortgage-backed security (MBS) is a type of an asset-backed security where the cash flows are backed by the interest and principal payments of a set of mortgage loans.

Mortgage-backed securities have become very popular among financial institutions looking for opportunities to invest in their communities, especially having in mind the benefits they provide to investors such as yield, liquidity, and capital management flexibility. Thus, investors in MBSs include banks, insurance companies, pension funds, corporations, etc.

However, mortgages can be paid off in their entirety earlier (prepayment) or more than the required monthly payment can be made (curtailment). This affects the remaining loan principal and makes the precise prediction of the monthly cash flow of an MBS impossible, which creates additional risk to MBS investors.

Understanding How an MBS Works:

Lenders group similar mortgage loans they have originated into "pools of mortgages" and then provide them to organizations like Fannie Mae and Freddie Mac which in turn securitize them.

When institutions like Fannie Mae, Freddie Mac and Ginnie Mae issue MBSs these MBSs are known as "agency" mortgage securities. Some private institutions also issue MBSs, and such mortgage securities are known as "private-label". Naturally, investors typically favor agency mortgage-backed securities because of their stronger guarantees and better liquidity.

Issuers or servicers of agency MBSs collect the monthly mortgage payments and then "pass through" the interest and principal to investors (therefore these pools are also known as mortgage pass-throughs). The mortgage-backed securities are further backed by the mortgaged properties.

Naked Short Selling

Many investors manage to make money from the decrease of stock prices thanks to the advanced investing technique known as short selling.

Basically, when short selling investors sell stock that they do not own but have been promised to get. Here is how: your broker lends you stock that can come from the brokerage firm's own inventory, another firm, or one of the other firm's customers. You sell the shares in the hope that the stock price will drop and the proceeds are credited to your account. At some point in the future you must buy back the same number of shares, hopefully at the expected lower price, and return them to your broker. If everything has gone according to plan you would have made a profit on the difference. If, however, the stock price have risen you would have lost money.

Now, "naked short selling" is something different. When naked shorting, the seller skips the step of borrowing the securities in time to deliver them to the buyer within the mandatory three-day stock settlement period. Thus, when delivery is due the seller fails to deliver the securities to the buyer which is known as "failure to deliver", or "fail".

The seller may fail to deliver for legitimate reasons such as human or mechanical errors, or processing delays when transferring the securities.

Naked short selling is not always violating of the federal securities laws or the Securities and Exchange Commission's rules, though when effected to manipulate the price of a stock it is prohibited.

NASD

NASD stands for National Association of Securities Dealers. This institution is being monitored by the SEC. NASD represents a self-regulatory institution that is responsible for securities brokers' activities. Some of the responsibilities of NASD include:

  • Broker licensing
  • Examination of broker activities
  • Consumer complaints examination

NASDAQ

National Association of Securities Dealers Automated Quotations or NASDAQ, represents a stock exchange system for quoting over-the-counter securities. As such the selling and buying of stocks is done in an electronic network of linked brokers.

The companies that are listed in this stock exchange represent relatively young companies. Other players on NASDAQ are companies that have supervised the experienced in the 1990s high tech boom.

Nominal Yield

Nominal yield represents the coupon rate of a fixed income security, which is the income, received from the security in one year, divided by its par value and stated as a percentage. Nominal yield does not vary with the market price of the security in contrast to current yield.

NYSE

NYSE stands for the New York Stock Exchange. This represents the stock exchange with the longest history in this field. The companies that are present in the NYSE are typically defined as blue chip companies, but they are not the only companies that are traded there. The NYSE is usually defined as the heart of America's financial trades. Its physical location is the Wall Street.

Online Broker

Investors have many alternatives to choose from to sell and buy stocks. One of them is through the use of online broker's services. If you select this type of a broker then you are given the opportunity to execute trades over the Internet. This type of stock trading leads to the lack of human contact. One of the advantages of using the services of online brokers is that the commission fees they charge are one of the lowest charged in this field.

Option

When an investor becomes an owner of an option s/he has the right to buy or sell a pre-determined number of shares of stock. The price of the stock is predetermined as well. However it is worth noting that the owner is not obliged to execute his/her right.

You can buy or sell an option on the open market. Many employers are starting to make options part of employees' compensation plans. The options are granted based on such factors as employee's performance.

Par Value

When the bond reaches maturity the bondholder is awarded the bond's par value. The alternative names that are commonly used are face value and principal value. For example, if the par value of a bond is $2,000, then when the bond reaches maturity its holder will receive $2,000.

Penny Stock

Investors have the option of choosing among many different types of stocks that come in variety of prices. If you are looking for cheap stocks that are usually sold at $1 or less then penny stocks are the stocks you are looking for. Such stocks are generally issued by very speculative companies. As a result they represent the stocks that are most subject to different swindles and schemes.

Position

With time investors accumulate a certain amount of holdings. In order to determine the current value of the possessed holdings investors generally refer to the term position. For example, if you are the owner of 200 shares of Microsoft then your position will be stated as "long 200 Microsoft".

Preferred Stock

There are many classes of stocks. One of them is preferred stocks. This type of stocks is usually bought by investors that are looking for a stream of income. As the name of these stocks implies, they give certain rights to their holders that are not found in common stocks. One of the rights is that preferred stock holders are the first in line when dividends are paid.

Price Earnings Ratio

When you decide on the investment in a particular stock you should make a careful examination of its indicators. One of them is its price/earnings ratio (P/E). This ratio shows the relationship between the price of the stock and the earnings that the company makes. In order to find the P/E of a company you should divide the current price of the stock by the earnings per share the company has annually.

A high value of a stock's P/E indicates higher expectations of investors regarding the growth of the company. This also means that investors are willing to pay a higher premium for the growth that the company will experience in the future.

Prospectus

By law every company is required to issue a prospectus and provide it to its investors and the potential ones. This document is required before the investor makes a decision on the investment in a particular stock. When the company makes an initial public offering the prospectus is needed for the potential investors to make reasonable decisions.

The prospectus includes information about the financial issues of a company. Additionally, it should include details regarding the investment risks that the stock potentially carries. Mutual funds and other regulated securities are also required to issue a prospectus.

Qualified Retirement Plan

There are many types of retirement plans employees can choose from. One of them is the qualified retirement plan. The latter is authorized by the IRS (Internal Revenue Service). These plans should follow particular rules and regulations in order to fall in this category and serve in the best interest of their holders.

These plans are deferred from taxes. Thus, employees are allowed to contribute to them and accumulate money without being bothered by Uncle Sam. The qualified retirement plans are usually sponsored by employers on behalf of employees. Examples of qualified retirement plans include 401k plans and IRA.

Recession

The economy goes through different cycles. One of them is recession. It is observed when the prices start to increase, the living standard starts to fall, unemployment rises, and businesses stop expanding.

Another indicator of recession is a decreasing gross national product (GDP) of a nation. In fact, many experts consider that there is an economic recession only when a negative GDP growth has been observed over two consecutive quarters.

However, it is generally considered that a recession starts when there have been several quarters of slowing even if they have been positive.

Economic recession is defined as a significant decline in the economic activity across a country, lasting longer than a few months. Normally, the recession is visible in real GDP growth, industrial production, wholesale-retail trade, real personal income, and employment.

Risk

Stock investing is marked with a high degree of risk. Therefore, you should be well aware of the fact that there are times when your investment will not return the money you have expected.

Risk Tolerance

Stock investing is surrounded with a high degree of risk, so when you begin in this field it is important to determine your risk tolerance.

Round Lot

Stock investing involves many terms you should be familiar with. One of them is round lot, which represents the basic unit for transaction measurement. It is equal to 100 shares. If your order cannot be divided by 100, then it is referred to as an odd lot. In such a case your broker may charge you an additional fee for the completion of such an order.

SEC

The SEC stands for the Securities and Exchange Commission. It represents the major entity that regulates the stock market and the participating companies. The latter are publicly traded and should abide by the rules set by the SEC.

Short Selling

Many investors use selling short as a legal way to increase their profits. When an investor expects that the price of particular stock is about to fall s/he asks his/her broker to borrow the stock from another investor and sells it. S/he gets the money from the executed sale. When the price actually falls, the investor purchases back the stock and gets the resulting profit. The owner that has lent the stock gets it back.

SIPC

SIPC stands for Securities Investor Protection Corporation. This entity represents a private agency that is sponsored by the US government. The major activity of the SIPC is to provide insurance against a potential failure on the part of a brokerage. Thorough this insurance your assets are protected from major losses. However, the insurance provided by the SIPC is not limitless. It is no more than $500,000 for each account you own. Additionally, you should keep in mind that the coverage of the insurance doesn't include losses from trades.

Small Cap Stock

Depending on the market capitalization of the company, stocks are classified in different types. If the market cap of a company is equal to $1 billion or less, then the stock is referred to as a small cap stock.

Stock Screen

Stock investors have many tools available for making the right investment decisions. One of them is stock screen (commonly referred to as stock screening). It represents software that most often is Internet enabled. It provides investors with the opportunity to specify certain criteria against which to find appropriate investments in stocks. After the criteria are set, the screen automatically finds stocks that answer these criteria and displays them on the screen.

Technical Analysis

When you evaluate stocks you can apply different techniques. One of them is technical analysis. This type of stock analysis uses such information as price movement, volume, open interest and etc. This data is collected and analyzed in order to determine future trends regarding the performance of the target stock.

As compared to fundamental analysis, technical analysis disregards the business itself, but instead concentrates on the indicators of the company. If you apply this analysis then you will use charts and graphics in order to easily notice trends and determine right points at which you can sell and buy a stock.

Trade

One of the most often used terms trade refers to the buying and selling of such financial instruments as stocks, bonds, mutual funds and etc. Trade can have several meanings depending on the context in which it is used. One of its meanings relates to the single transaction that is executed. Another meaning relates trade to the overall market, for example it explains all the trading activity that has been experienced.

Value Stock

Many investors prefer to spot value stocks and invest in them. These stocks are usually overlooked by the market in its chase after "hot" deals and as a result the price of a value stock is below its real worth. The under pricing of the stock is not related to the business fundamentals of the company that has issued it. Value stock is just not part of the industry that catches the current market attention.

Value investors focus on finding such hidden treasures. They wait for the market to correct the price of the undervalued stock with the needed patience and discipline applied and enjoy the profits afterwards.

Warrant

Investors have many tools to choose from when stock investing. One of them is warrant. The holder of a warrant has the right to buy a determined number of shares at a specified price. However, the warrant holder is not obliged to do so.

Many companies issue warrants in order to stimulate investors when the company issues new stocks.

Wealth Building

Wealth builders represent a group of concepts concerning accumulation of wealth. One of the wealth building concepts enjoying highest popularity is compounding of interest. It is useful to know other concepts that fall in the wealth builder category in order to make the best use of them and increase the value of your assets.

Yield

When you decide on the investment in a particular stock you should study its yield. It represents the annual return that is generated by the investment. Yield is commonly expressed in percentage.

Yield to Maturity

Yield to Maturity is usually associated with bond investing. It is very useful measurement, but its calculation is very complicated. Under the assumption that the generated interest payments are invested back in the coupon rate of the bond, yield to maturity includes:

  • Current market price
  • Coupon rate
  • Time to maturity

Since the calculation of this measurement is very difficult and involves many considerations, it is advisable to use special software for these purposes. Additionally, many programmable business calculators are available to facilitate your work.