Financial Economics Terms

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Dividend

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A small cash payment made by a company to shareholders, typically quarterly. The majority of companies don't pay dividends.

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Trading Symbol

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An abbreviation used to identify publicly traded shares of a particular stock on a stock market.

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Capital Gains

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The rise in a stock's market value during the period that you own it.

For example, if you buy Nathan's Famous (NATH) at $15.56 per share and it rises to $18.75 per share, you have made a capital gain of $3.19 per share for a total gain of $319 (if you own 100 stocks).

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Capital Loss

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The decrease in a stock's market value during the period that you own it.

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Dividend Yield

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The dividend per share divided by the price per share.

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Candlestick Chart

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Charts that divide any trading period, such as a day or a week, into smaller intervals.

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Odd Lot

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To buy blocks of less than 100 shares.

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Transaction Fees

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The cost of buying and selling shares.

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Online Trading Site

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Websites that allow you to trade stocks.
i.e. TDAmeritrade, ETrade, Scottrade, or Charles Schwab.

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Stock Market Exchange

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A form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities and complies with the requirements of Reg NMS, subject to approval of the SEC (i.e. NYSE Euronext, NASDAQ OMX, BATS Global).

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Margin Accounts

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An account type that gives you the right to borrow half of the value of your stock purchase rather than using only your own cash in the account. If you have $12,000 in a margin account, you can buy up to $24,000 worth of stock.

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Margin Call

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A notification that occurs if the margin loans exceed more than 50% of the value of stocks in the account. This requires you to quickly post more cash or sell stocks and if you don't, the broker will sell stocks on your behalf.

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Stock Market Index

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A portfolio such as the Dow or the S&P 500 that is meant to provide a measure of how the general stock market is doing rather than an individual stock. When the news reports that "the S&P 500 was up today," that generally means that stocks in general rose.

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Dow

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Short for Dow Jones Industrial Average (DJIA), it is a stock market index that consists of 30 enormous recognizable companies. Each of the 30 stocks in the Dow has equal weight. Not a very good measure of overall stock market strength because of the huge size of the Dow companies and the fact that there are so few companies in it.

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S&P 500

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Short for Standard & Poor's 500, it is a weighted index made up of 500 large companies across many sectors. Because it is made up of only large companies, it only shows how large companies are doing in the stock market.

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NASDAQ

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Also NASDAQ Composite, is a weighted index of all stocks (more than 3,000). This is still a worse indicator than the S&P 500, however, because NASDAQ has a disproportionately high percentage of technology companies in the index and many of these are much more volatile and prone to failure. Therefore, it over-represents the technology sector and at times is more volatile than the other two indices.

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Market Capitalization

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Also called market cap, this is a measure of the relative size of a corporation as measured by the market value of all of the outstanding shares of its stock. The market cap will be equal to the number of shares outstanding times the price per share. In the S&P 500 and NASDAQ Composite, stocks are weighted by market cap.

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Large Cap Companies

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Companies with a large market cap. There are also mid cap, small cap, and micro cap companies. The distinctions are not commonly agreed upon, but the following classification is useful:

Large Cap: above $10 billion
Mid Cap: $2 billion to $10 billion
Small Cap: $300 million to $2 billion
Micro Cap: below $300 million

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Russell 2000 Index & Russell Midcap Index

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Small cap and mid cap indices, respectively that are often less quoted by the media.

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dot.com Crash

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Stock market crash that occurred between March 2000 and October 2002, when technology shares in companies that had been bid up wildly by speculators came crashing down.

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Mutual Funds

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Mutual funds are huge portfolios made up of various combined financial assets including, but not limited to, stocks. Mutual funds are typically offered by mutual fund companies such as Vanguard or Fidelity, who pool contributions by investors to purchase a large portfolio of stocks. Mutual funds do not trade like stocks. Transactions are made after the market is closed and the share price is determined by the closing value.

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Equity Mutual Funds

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Equity mutual funds are a class of mutual funds that are made up of stocks exclusively.

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Exchange Traded Products (ETPs)

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ETPs generally consist of either Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) and are like a cross between a mutual fund and a stock. ETPs represent an invested portfolio of something (stocks or something else).

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Publicly Listed Company

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A company that offers securities (stocks, bonds, etc.) for sale to the general public. Stocks cannot be sold until a company is publicly listed.

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NYSE & NASDAQ

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New York Stock Exchange and NASDAQ are listing services in the U.S. Companies that want to have their stocks traded on a large scale must choose between these services and submit an application.

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Initial Public Offering (IPO)

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Shares of stock in a company are sold to the public on a securities exchange for the first time. These shares are mostly newly issued shares intended for the event. The purpose of an IPO is to raise new cash through the sale of new shares.

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Secondary Private Markets

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A special kind of market for trading prominent unlisted private stocks among wealthy traders. The legality of these is questionable.

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Accredited Investors

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Investors who have a net worth of more than $1 million or income greater than $200,000 per year for at least two years. Accredited investors are the only people who can trade on the secondary private markets.

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Over the Counter (OTC) Market

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Smaller free-wheeling listing market of companies that trade. The listing standards are low and prices are typically less than a dollar. The OTC is more of a stock casino than a stock market.

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American Depositary Receipts (ADRs)

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ADRs allow foreign companies to trade on U.S. markets in U.S. dollars.

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Cross-listed

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Companies that are listed and traded in multiple exchanges (i.e. foreign companies listed in the U.S.) are cross-listed.

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Stock Split

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Keeps the stock price for any given stock trading in an attractive range. This is accomplished by increasing the number of shares outstanding and decreasing the prices proportionately. A 2-for-2 stock split, for example, doubles the number of shares outstanding and halves the price of the shares.

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X Date

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The date on which a stock split becomes effective.

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Reverse Stock Split

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Reverses the proportion of stock outstanding by some ratio (commonly 1-for-10). This is a sign of distress because it means that the stock price is too low and the company may be in danger of becoming delisted.

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Adjusted Close

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Stock prices that are adjusted for a stock split or reverse split. Seen on historical stock market charts.

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Best Bid

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Best price (highest) that an investor is willing to pay for an asset (best available price to sell to).

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Best Ask

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Best price (lowest) that a seller is willing to accept for an asset.

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Level I Quotation

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Quotation showing only best bid and best ask.

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Market Order

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An order that instructs a broker to buy or sell stock at the best possible price.

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Trade Ticket

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Allows traders to keep track of orders and specifies the action, quantity, type of order, etc.

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Limit Order

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Order that allows you to specify a specific price at which you want to make a trade.

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Time-in-Force

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Determines the length of time that a limit order stays active.

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Day Order

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Instructs the broker to leave the limit order in effect only during normal stock market hours for the day.

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Day+ext

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Time-in-Force that instructs the broker to leave the limit order active throughout the day and in the after hours market until opening the next day.

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GTC/GTD

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"Good until cancelled" limit order option (also Good Til Date). Allows you to set an expiration on your limit order.

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GTW

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"Good through the week" limit order option.

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Depth of Market/Level II

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Display of pricing queue for securities that displays limit orders arranged by price.

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OFFER

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(a.k.a. ASK column) Level II column that contains limit orders to sell

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BID

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Level II column that contains limit orders to buy

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Securities Industry Automation Corporation (SIAC)

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Subsidiary of the NYSE Euronext (a stock exchange). Its purpose is to provide technical services for the exchanges themselves, members and other financial institutions. In this role, SIAC provides the computers and other systems required to run the exchanges.

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Consolidated Quotation System (CQS)

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The electronic service that provides quotation information for stock traded on the American Stock Exchange, New York Stock Exchange, and other regional stock exchanges in the United States.

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National Best Bid and Offer (NBBO)

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Highest bid and lowest ask.

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Protected Best Bid and Offer (PBBO)

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Like the NBBO but takes into account the growing importance of stock quotes from markets that are not included in the CQS, such as the dark markets.

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Discontinuities

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Spots where there is a clear breach in the spread between a price and the next quoted price in the series. This occurs as a result of after hours trading, particularly with actively traded stocks in volatile markets when limit orders are placed.

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Short Sale

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Transaction in which the order is reversed. The stock is sold first by borrowing the stock in-kind and promising to repay it in-kind later. Then, the stock is bought. You do this when you think that a stock is going to decline.

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Buy to Cover

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Buy to complete the short sale transaction.

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Short Ratio

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The number of shares sold short divided by the average daily trading volume. This is also called the days short because it is the number of days on average that it would take to clear off all short sales if all volume was dedicated to shorts going long.

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Shorts as a Percent of Float

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Percentage of all shares outstanding that are shorted.

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Short Squeeze

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A phenomenon that occurs when there is a high prevalence of shorts. This results in a heavily-shorted stock beginning to rise in value, forcing sellers to buy to cover their positions, further accelerating the price increase.

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Stock Exchange

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Serves to match a seller with a buyer at a price that is agreed to and is responsible for executing and clearing the order.

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Electronic Communications Networks (ECNs)

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Fully electronic automated order trading and clearing networks.

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Reg NMS

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(a.k.a. the SEC Regulation National Market System) is a mandate made in 2005 by the SEC that allowed the ECNs to become exchanges.

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Protected Quotes

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Public quotations in the Reg NMS (not dark market quotes).

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Market Makers

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Traders whose job is to supply liquidity to the markets at all times and when no one else will, which by example means that they are willing to supply both bids and asks for selected stocks.

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Spread Arbitrage

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Automated algo-trading technique in which the trader profits from the spread between bid and ask (by adding to inventory from the bid side and depleting from the ask side).

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Algo-trading

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Computer automated trading that seeks spreads between bids and asks and will complete trades (limit orders) without human intervention.

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Dark Market

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A separate set of exchange rules and conventions that are mostly for large-block trades. It allows the trader to list market and limit orders without exposure (good for large orders).

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Dark Pool

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Queuing of limit orders that are not publicly available and do not appear in the Level II queue.

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Market Impact

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Impact on the decisions of other traders (due to a trade of large size, for example).

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Intermarket Sweep Order (ISO)

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Semi-automated procedure to accomodate large block transactions.

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Cross Trades

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Trades in which buy and sell orders, whether limit orders or market orders, are matched internally and executed without the order being released to PBBO.

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Secondary Public Offerings

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Second offering of shares of stock after the IPO. Like the IPO, this serves to add more cash capital to the company itself.

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Sympathy Move

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When the stock price of companies related to another company moves in the same way (suppliers decline when company declines).

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Bulls & Bears

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Optimists & pessimists.

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Round Lot

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Group of 100 shares or any multiple of 100 shares.

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Block Trade

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Trade for sale or purchase of a large quantity of securities (thousands of shares).

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Earnings

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Profits

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Trailing Twelve Months (ttm)

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How much the company made in the last twelve months (static earnings).

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Earnings Growth

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Rate of earnings, sometimes more important than actual earnings (high projected growth is good)

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Price to Earnings Ratio (P/E)

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Price per share of a stock/annual earnings. Annual earnings are usually represented by its operating profit for the last year (ttm) in which case it is called the trailing P/E. If estimated future earnings begin to rise, trailing P/E will rise.

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Forward P/E Ratio

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Price per share of a stock/estimated future earnings.

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Guidance

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Overviews provided by a company as part of their quarterly earnings report that contain information about how the company is expected to do in the future. Based on this guidance and other research, stock tracking analysts form an estimate of a company's earnings.

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River of Money

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New cash flow coming in from large institutional investors such as pension funds, insurance companies, hedge funds, mutual funds, and now ETPs/ETFs. The river of money is important because it establishes a strong demand floor for stocks (as long as it is positive).

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Portfolio Effect/Portfolio Shift

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Shift in preference of assets. For example, during an inflationary period there is often a shift in preference from stocks to bonds because they are interest bearing and associated with lower risk.

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Rebalance

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Change the proportion of major classes of investment assets in a portfolio.

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Real Returns

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Yields adjusted for inflation.

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Nominal Returns

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Actual market yields (not adjusted for inflation)

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Flight to Quality

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Global portfolio shift away from stocks and other classes of bonds like corporate bonds and the bonds of foreign governments, into exclusively U.S. Treasury Securities because of their perceived safety.

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Momentum Ramp

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A rapid acceleration of stock prices. Often a result of a stock being undervalued, justifying a rapid rise which, in turn, leads to speculative investments that cause more rising. Can reach exponential growth before it is corrected, which sometimes occurs through collapse.

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Merger

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Two companies of roughly equal stature combine to form one much larger company. If shareholders expect synergy, the stock price of the new merged company can rise. If not, it may stall in the markets.

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Acquisition or Buyout

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When one company, typically larger, buys another and absorbs the latter so that the identity of the purchased company largely disappears. This is almost always beneficial to shareholders of the target company because if it is publicly traded the larger company must buy a majority of the stock outstanding and if competitors of the buying company do not want this to happen they may wage in a bidding war to raise the price of the shares.

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Target Company

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Company being acquired during an acquisition/buyout.

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Payment Date

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Actual date on which a dividend payment will be credited to the shareholder who was on record on the record date.

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Record Date

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Usually about a month before the payment date, any shareholders of a stock on the record date will receive a dividend on the next payment date regardless of whether they still own the stock by that date.

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Ex-dividend

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Holding a stock "ex-dividend" means that you bought a stock after the record date and as such, you are not entitled to the next dividend payment.

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Target Retirement Fund

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Class of mutual fund that provides a relatively safe hybrid of assets targeted towards a certain retirement date. These funds are designed to turn more conservative as the investor ages, typically by rebalancing away from a stock-based portfolio to relatively more yield-bearing assets (bonds) as the target date approaches. The problem with this fund is that it has a high churn rate and thus it can have high hidden fees.

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Diversity

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Benefit of investing in mutual funds. Allows you to spread your money across many companies and sectors, etc. This greatly reduces risk without necessarily reducing yield.

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Prospectus

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Document provided by mutual funds (it is required by federal law) that contains information regarding fees and expenses, performance metrics, composition of the fund portfolio, investment strategy, and the name of the management team.

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Front-end Load

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A one-time sales fee that you often have to pay when you invest in mutual funds. Often as much as 5% of the investment value.

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Loads

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Sales fees associated with mutual funds.

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No-load Mutual Funds

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Mutual funds without sales fees. The smart investor looks for these. No load( front-end or back-end) or deferred sales charge.

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12b-1 Fees

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Advertising fees that some mutual funds charge. This is listed in the prospectus. You should never pay for advertising fees.

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Expense Ratio

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Bottom-line fee for a mutual fund. It is a summary of all fees except loads expressed as a percentage of the NAV. For index funds, look for 0.75% or below, for conventional equity funds - <1%, specialized sector funds - <1.5%, for bond funds - <0.25-0.5%.

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Turnover (Churn) Rate

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Judicious buying and selling of securities with the goal of earning a higher rate of return than the rate represented by the indices and enough to overcome the transaction costs of the churn. This often manifests itself in hidden fees.

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Distributions

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When a mutual fund receives dividends from its dividend-paying stocks and sends the proceeds to the share owners, this is called distribution. Distributions can be paid in cash or reinvested (more common). Either way, these are often taxed.

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Rollover IRA Account

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Tax deferred account in a mutual fund or brokerage. If you leave a company, you have the right to claim whatever retirement account has been established at that company for you and transfer the proceeds from the liquidation to a Rollover IRA. There is no tax penalty for doing this.

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Exchange Traded Fund (ETF)

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A security that tracks an index, commodity, or basket of assets but trades like a stock on an exchange.

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Market basket

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Collection of securities that makes up an ETP

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Direct (long) equity index ETF

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Tracks an index directly and proportionately

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Inverse (short) equity index ETF

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tracks an index proportionately in the inverse

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Leveraged ETF

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tracks by some multiple of the index. Can be long or short.

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Global index funds

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tracks an index for stocks specific to a country or a region (usually long)

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Bond ETP (Fixed Income ETP)

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Tracks the price of a specific bond index, weighted sum of a market basket of bonds.

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Sector Equity ETP

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tracks an index specific to a sector (usually long)

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Commodity

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tracks the prices of single commodities or indexes of commodity groups

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Delta

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daily change in price

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Delta-tracking

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tracks the delta rather than the day to day price. always some error so it doesn't track day to day

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Net Asset Value (NAV)

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the value of the assets owned by the ETF divided by the number of shares outstanding

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Intraday NAV (iNAV)

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the NAV listed throughout the market hours

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Premium

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if the market price is above the NAV

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Discount

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market price is below the NAV

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Annual expense ratio

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percentage annually of total fund assets that will be withdrawn from the fund to pay management and other expenses

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Prospectus

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the legal document required by the SEC that includes information about the investment objective, asset holdings, performance over time, annual expense ratio, fees, correlation between NAV and market price, and the portfolio turnover rate.

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Call option

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gives the owner the right to buy 100 shares of stock at the strike price before the expiration date from the person who sold the call

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Put option

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gives the owner the right to sell 100 shares of stock at the strike price before the expiration date from the person who sold the put.

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Write a call/put

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Sell it

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Out of the Money

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when a call option strike price is above the current price of the stock or when a put option's strike price is below the current price of the stock

In the money is opposite

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Covered call/put

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If the person writing the put/call already owns the stock

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Naked call/put

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Person writing the put/call doesn't own the stock (risky)

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Exercising

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Carrying out the option

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CBOE

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an exchange that lists stock options and determines which stocks can have options

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Offset

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A transaction that gets you out of an option contract, i.e. selling the option

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Open interest

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represents the total number of contracts outstanding and still in force

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Premium

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difference between in the money option price and its intrinsic value

Call premium = option price - (stock price - strike price)
Put premium = option price - (strike price - stock price)

OTM options are said to have either no premium or a premium equal to their entire value

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Bill

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matures in one year or less, discounted financial asset

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Note

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maturity of 1-10 years, pay coupon interest either quarterly or semi-annually

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Bond

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maturity of more than 10 years, pays coupon interest semi-annually

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Discounted financial asset

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no direct interest is paid to the owner of the bill, it is sold at less than its maturity value and redeemed at its maturity value

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Coupon

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interest payments are paid to the owner of the bill

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Treasury Direct

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where you can buy and sell securities without paying a commission

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TIPS

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securities whose principal is adjusted by changes in the CPI. with inflation (rise in the CPI), the principal increases. CPI also affects interest - if inflation occurs, interest increases.

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Premium

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security price trading above par ($100), occurs if yield is below the coupon rate

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Discount

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security price trading above par, occurs if yield is below the coupon rate

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Dutch auction

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allows the market to set the effective yield on new securities by setting the price of the security; means for securities to become available.

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Coupon rate

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fixed interest rate stated by the issuer of the security

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Noncompetitive bid

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submitted if the buyer is willing to accept whatever yield results from the competitive bids, but doesn't contribute to the determination of the yield.

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Competitive bid

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specify the amount they would like to purchase and the minimum interest rate they will accept

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Secondary market

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where bonds and stocks are resold

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Par

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redemption value

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Federal Funds Rate

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The interest rate (annualized) charged among financial institutions as they borrow and lend excess reserves from and to each other.

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Discount rate

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Set by the Federal Reserve Board of Governors, this is the rate charged by the FRS for direct loans of reserves from the FRS.

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Prime rate

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The benchmark rate used by commercial banks for their corporate borrowers