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Financial Dictionary

Financial Terms A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

ADR: American Depository Receipt. A certificate representing a specific number of shares in a foreign-listed company. The certificate is issued in U.S. dollars while the underlying securities (shares on the foreign exchange) are held by the U.S. bank that issues the receipts. ADRs are regulated by the Securities and Exchange Commission (SEC) and traded on the New York Stock Exchange.

AMEX: Stands for American Stock Exchange. Founded in 1921, AMEX trades small- and medium-sized stocks. AMEX is located in Manhattan and trades more foreign stocks than any other U.S. stock exchange.

Ask Price: The offer price, or the going price at which a market maker offers to sell you shares of a company.

Basis Point: A unit that equals 1/100 of one percent. Basis points (or simply "points") are the unit of measure for change in financial instruments.

Bear Market: A period when the market steadily declines in value, or when stocks remain at depressed levels.

Bid Price: The price that a market maker is willing to pay for a set number of shares.There may be several market makers establishing bid and ask prices for a stock at any given time.

Big Board Stocks that trade on the New York Stock Exchange (NYSE) or on the American Stock Exchange (AMEX).

Book: A broker’s book that contains the names and addresses of customers, notes, and trading records.

Breakeven Price: The price that an underlying instrument must reach in order to produce intrinsic value in the option equal to the buyer’s cost of initiating the position. Calculating the breakeven price helps you make an intelligent decision about whether to buy the option.

Bull Market: A period when the market steadily rises in value, or when stocks remain at high levels.

Call: The option to buy a share at a specified price within a given period of time.

Cash Account: Your securities account with a brokerage firm with which you pay for your purchases in full.

Churning: Willful, excessive trading in a customer’s account that results in continuous losses of the customer’s funds and continuous commissions for the broker.

Close: To exit the options market.When you sell an option, you are selling back to the market, telling your broker to resell it ‘to close.’

Commissions: Fees that brokers charge investors when buying and selling options and other investments. Many brokers have special deals on volume trades — if you can arrange them.

Common Shares: Securities that represent an ownership interest in a company.

Covered Call: A call where the writer already owns the stocks that he may find himself obligated to sell.

Crossing: A form of trading in which stock is sold from one account to another without actually reaching the market.

Dividend: A portion of the earnings to be paid out to the holders of each share of stock.The amount is determined by the company’s Board of Directors and is usually paid out quarterly.

EPS: Stands for "earnings per share." The earnings that are available to common stockholders divided by the number of common shares outstanding.

Exercise: The act of buying or selling the underlying optioned material. You would not exercise an option unless it is a winning position.

Expiration Date: The last day an option can be exercised or offset. Make sure you know the exact expiration date of any option you purchase. Once an option has expired, it no longer conveys any rights and, in effect, ceases to exist.

Extrinsic Value: The worth of the premium represented by time and volatility, as opposed to the option’s real or intrinsic value.

Fixed Costs: Costs that remain constant regardless of the volume of operations.

Front: Buying or selling a security before a promoter begins to push the stock.

Gross: The total commission that is earned by a broker.

Hedge: Any maneuver to protect capital or profits, either by buying or selling the underlying item or by using an option or derivative.

Hold: In WaveStrength, this just means to continue to hold what you have with whatever stops have been noted in our most recent alert. Do not sell off the position or add to it.

Insider Trading: Illegal trading of securities based on trading information that is unavailable to the general public.

In-The-Money Option: An option with intrinsic value. An in-the-money call option has a strike price below the current price of the underlying instrument. An in-the-money put option has a strike price above the price of the underlying instrument.

Intrinsic Value: The portion of the premium representing real value.An option has intrinsic value if the difference between the market and strike prices would make the option profitable if exercised.

IPO: Stands for "initial public offering." A corporation’s first offering of stock to the public.

IPO Shares: The number of shares that are available on the IPO date.

Issue: To authorize the sale of shares of stock.

Juice/Bone: The potential commission a broker sets in a buy or sell transaction.

LEAPS: Stands for "Long-Term Equity Anticipation Securities." It is an acronym for options that can run up to three years in time. They are traded on various options exchanges and include stocks, stock indexes, and other instruments traded on those exchanges. In effect, a LEAPS call is a substitute for the actual shares of stock during its life — if it is in-the money. If it is out-of-the-money, a LEAPS call may be considered a cautious way to control the price of a rising stock with limited risk over a very long time.

Leverage: In personal investing, using financial instruments or borrowed funds to enlarge the possible gains on an investment. In a company, the amount of borrowed funds supporting the company’s assets. Companies with more debt than equity are considered "highly leveraged".

Limit Order: A buy order to purchase an option at or below a specified price, or a sell order to sell an option at or above a certain price. Use limit orders to minimize risk, but be aware there is no guarantee your option can be bought at the desired price.

Liquid Asset : An asset, such as a blue chip stock or money market security, that can be quickly converted into cash.

Liquidity: The ability of the market to absorb a reasonable amount of buying or selling in a particular security at reasonable price changes. When talking about a specific security, liquidity is the ability to convert it to cash quickly. Blue chips and money market securities are two examples of liquid assets.

Lock In: Protecting gains.This can be accomplished with a trailing stop, or by buying a protective, out-of-the-money option to act as a hedge and keep the door open to further profits if the trend continues.

Lock-Up Agreement: A legally binding contract prohibiting company employees, initial investors and other “inside” stockholders from selling their shares for a given period of time, usually 180 days, after the company’s initial public offering.

Lockup Shares of Total Shares: The percentage of lockup shares versus the total number of shares outstanding.

Long Position: Long means buy. If you hold a long position in CPST shares, you just bought Capstone.

Margin: The amount paid by a customer when using a brokerÕs credit to buy or sell a security.

Margin Accounts: Good-faith deposits investors make to their broker when borrowing from the broker to buy securities and futures. Buying on margin exposes you to unlimited risk. Margin risk may differ depending on the WaveStrength service.

Market Maker: A member of an options trading exchange who stands ready to sell or buy back options, giving liquidity to the system.

Market Order: An order to buy or sell an option at the market price, synonymous with telling your broker to "do his best" as quickly as possible.Using a market order means you have no control over your entrance or exit price, making your risk uncertain.

Market Price: The last reported price at which the stock or bond sold.

Naked Call: The opposite of a covered call; a call where the writer does not own the shares he may become obligated to sell. Instead, he writes the call against a cash deposit in a margin account.

Nasdaq: Stands for "National Association of Securities Dealers Automated Quotation System."

NYSE: Stands for "New York Stock Exchange." The oldest (1792) and largest organized securities market in the United States.

Offer Price: The price asked for a share of stock; the going price at which a market marker is offering to sell you shares of a company.

Offset: Closing out a position in a previously purchased option by selling it in an offsetting transaction prior to expiration.This is done by exercising an option and immediately putting the just-acquired security back on the market, either by selling stocks gained from exercising a call or by buying stocks sold in a put. This immediately captures the optionÕs intrinsic value and locks in profits.

Option: A financial instrument giving an investor the right, but not the obligation, to buy or sell a specific investment at a set price for a predetermined time.

OTC: Over-the-Counter. A stock that is traded through a network of brokers, instead of on a centralized exchange. OTC stocks are often from very small public companies or companies on foreign exchanges. Brokers trade these stocks on the OTC BB or on the pink sheets. Due diligence is especially important for OTC stocks since the companies are not required to meet SEC standards.

OTC BB: Over-the-Counter Bulletin Board. The National Association of Securities Dealers (NASD) provides this electronic trading service for OTC stocks and all bonds, showing real-time quotes, last-sale prices and volume of trading. Companies must file current financial statemetns with a banking or insurance regulator or the SEC to trade on the OTC BB, but the board has no other listing requirements.

Out-Of-The-Money Option: An option with no intrinsic value.That is, if you exercised the option you would lose money on the difference between the market and strike prices.

Overvalued: The description of a stock whose current price is not justi- fied by the earnings outlook or the P/E ratio.

Paper Trade: Tracking options daily on paper, without actually investing any money in them.This is a good way to learn about premium movements as they relate to the underlying stock or future without risking any capital. Once you’ve paper traded for a while, you’ll be ready to start investing in QQQ options.

Pink Sheets: The National Quotation bureau compiles this list of OTC stocks on a daily basis. The pink sheets include the bid and ask prices and the market makers who trade the stocks. Companies on the pink sheets don’t have to comply with SEC regulations, but these stocks are sometimes those of companies listed on foreign exchanges that don’t allow regular U.S. investors.

Premium: The price you pay to open a put or a call.The premium is the sum of an option’s intrinsic value and time value. Premiums are arrived at in the open competition of buyers and sellers.

Price-Earnings Ratio: The price of a stock divided by the earnings per share of the company. A stock selling at $45 a share with earnings of $3 per share would have a price-earnings ratio of 15.

Prospectus Date: The date at which a security is offered for sale to the public (IPO).

Put: An option giving the buyer the right, but not the obligation, to sell 100 shares of stock or a futures contract at or by a specified date at a set price (the strike price). Often used as insurance against falling stock prices, a put buyer is looking to profit from a decrease in the price of the underlying instrument.

Quote: The highest bid to buy and the lowest offer to sell a security in a given market at a given time.

Ramping Up: The point at which a firm decides to concentrate on buying a stock with the intent of pushing up the price.

Resell: The act of selling an already-bought option back into the marketplace, thus closing the position. Use the term "resell" so brokers will not make the mistake of selling (writing) an option in the subscriberÕs open instead of closed account.

SEC: Stands for "Securities and Exchange Commission." The SEC is a federal agency created by the Securities Exchange Act of 1934 to administer that Act and the Securities Act of 1933, duties formerly carried out by the Federal Communications Commission (FCC).

Series: The range of strike prices available for an option.

Series 7: A standardized test that a broker must pass before he or she can sell securities.

Shares: The number of shares a company has authorized to be sold but that have not yet been issued; shares of a company that have been issued for outstanding shares.

Short: Selling a security to profit from an anticipated fall in its price.

Short Position: (1) Stocks sold short and not covered as of a particular date. (2) The total amount of stock an investor has sold short and has covered.

Short Squeeze: Occurs when investors who have sold borrowed shares in anticipation of replacing them at lower prices are forced to cover those borrowed shares by buying shares, even at a higher price.

Stop-Loss: An order placed with a broker to liquidate once a specific price level has been reached.A technique used to limit losses.

Strike Price: With calls, the specific price at which the buyer of a call option has the right, but not the obligation, to buy the underlying instrument; with puts, the specific price at which the buyer of a put option has the right, but not the obligation, to sell the underlying instrument.

Superleverage: The art of using other people’s money to try to profit while maintaining limited risk at all times.The purchase of put and call options is one form of superleverage.

Tight Float: The float is the total number of shares (other than those held by institutions, insiders, and the firm) estimated to be trading. A tight float refers to the lack of shares trading in the marketplace and is an indication of the volatility of the issue.

Trailing Stops: A stop-loss order that automatically goes higher as an option moves up in price. This can lock in greater profits if the market reverses, but be aware that sometimes profitable trades may reverse, triggering the trailing stop, and then resume their upward move.

Underlying Instrument: The investment instrument an option gives you the right, but not the obligation, to buy or sell.While WaveStrength primarily deals with stock options (security options), options are available on a wide variety of investments.The current price of the underlying instrument directly relates to the cost of the option (premium).

Underwriters: A group of investment bankers who assist in selling IPO shares at the offering price. Their primary purpose is to assist in the distribution of the new stock and spread the risk associated with the offering.

Unlock Date: The date, usually 180 days after the company’s initial public offering, when stockholders bound by a lock-up agreement can begin trading their shares. Unlocking stocks does not affect a company’s stock price directly, but a subsequent spike in trading can.

Volatility: The fluctuation in market price of the underlying security. Volatility can be a key factor in an option’s premium.

Writer: An individual who sells calls and puts.The writer has an obligation to sell the stock (in the case of a call) or buy it (in the case of a put) if the option buyer decides to exercise the option. All the money an options writer will make is known at the time the option is written: it consists of the premium received from the buyer, less the commission the writer pays his broker. You will find this glossary — and more useful information, in the Taipan Group’s trading "bible", Hot Trading Secrets (Wiley, 2005)