Stock Market

42.

Stock Market Terms and Glossary

Accredited Investor

Term used by SEC in Regulation D of private placements. Concept: although 35 is the upper limit of persons who may purchase a private placement, accredited investors are not included in this number. General definition of accredited investors: institutional type accounts and persons of wealth (persons with a net worth of $1 Million or more, persons with annual income of $200,000 or more, persons who purchase $150,000 or more of the offering and this does not represent more than 20% of their net worth).

Accrued Interest

The amount of interest that has been earned since the last interest payment date. When a bond trades, the buyer pays the seller the accrued interest - a pro rata portion of the next interest payment, which will be paid to the buyer of the bond.

Accumulation

The act of buying more shares of a security without causing the price to increase significantly. After a decline, a stock may start to base and trade sideways for an extended period. While this base builds, well-informed traders and investors may seek to establish or increase existing long positions. In that case, the stock is said to have come under accumulation.

Accumulation Distribution Line

A momentum indicator that relates price changes with volume. It relates the closing price to the range of prices (H - L). The closer the close is to the high, the more volume is added to the cumulative total.

Advance Decline Line

One of the most widely used indicators to measure the breadth of a stock market advance or decline. The AD line tracks the net difference between advancing and declining issues. It is usually compared to a market average where divergence from that average would be an early indication of a possible trend reversal.

Advance Decline Ratio

The ratio of advancing issues over declining issues. Taking the moving average of the AD ratio will smooth it so it can be used as an overbought and oversold indicator.

Advancing

A market stage of a stock that is characterized by an uptrend with subsequently higher highs and higher lows.

Advancing Declining Issues

A market momentum indicator using the advancing issues and the declining issues. It subtracts the declining issues from the advancing ones and is usually smoothed to make it a good overbought oversold indictor.

Aggregate Exercise Price

Term in security options: the exercise (strike) price times the number of securities involved in the contract. For example, a call is purchased at $50 for 100 shares. The aggregate exercise price is $5000 ($50 x 100). Exception: GNMA options and T-Bill, T-Note, and T-Bond options, in which the aggregate exercise price is the strike price times the face value of the underlying contract.

Alpha

A measure of the residual risk that an investor takes for investing in a fund rather than a market index. It represents the difference between a mutual fund's actual performance and the performance that would be expected based on the level of risk taken by the fund's manager. If a fund produced the expected return for the level of risk assumed, the fund would have an Alpha of zero. A positive Alpha indicates the manager produced a return greater than expected for the risk taken. A negative Alpha indicates the manager has not adequately rewarded investors for the risks taken.

American Depository Receipt (ADR)

Securities issued by commercial banks that represent the shares of a foreign company. ADRs trade just like normal stocks on various US stock exchanges. Their performance usually parallels that of the parent company on its domestic exchange.

Bear Spread

An option strategy with maximum profit when the price of the underlying securites decline. In futures, short the nearby future and long the deferred in anticipation of a decline in the general level of prices.

Bear Trap

A situation that occurs when prices break below a significant level and generate a sell signal, but then reverse course and negate the sell signal, thus "trapping" the bears that acted on the signal with losses. A bear trap is another form of whipsaw and relates to the spring.

Below the Market

A limit order to buy or sell a security for a specific price that is lower than the current market price. If the market does not reach these prices, the order will go unfilled.

Beta

A measure of a security's systematic or market risk. While most stocks move in in the same direction as the stock market, the level of the beta indicates the degree of correlation between a security and the market. The market is the benchmark and has a beta of 1.

Blowoff

Market turns that happen very quickly with little or no transition period. Blowoffs often occur when a market has become very overextended in one direction, when a sudden piece of adverse news causes a sudden reversal. Reversal spike highs (aka blowoffs) and lows (aka selling climaxes) can signal a reversal or deceleration of a trend, but unfortunately they are very difficult to forecast.

Blue Chip Stock

A well known, public company that is thought to be in good financial shape and have sound fundamentals (profitability, earnings). An investment in a blue chip is regarded as a safe investment. Examples include Wal-Mart, Coca-Cola and General Electric.

Bollinger Bands

An indicator that allows users to compare volatility and relative price levels over a period of time. It consists of three bands designed to encompass the majority of a security's price action. Prices will often meet resistance at the upper band and support at the lower band. See ChartSchool article on Bollinger Bands.

Bond Yield

The return an investor would earn if a bond was purchased and held to maturity. Usually, the longer the term of a bond, the higher the interest rate that's paid to the holder, compensating for the inflation risk of having money tied up for a long time. To determine the yield, divide the interest rate by the purchase price of the bond.

Box Size

In Point & Figure charts, it is the price value of one "X" or "O". An X is shown when prices rise by the box size, and an O is shown when prices fall by the box size. Increasing the box size filters smaller price movements.

Breadth

A comparison of the number of issues traded with the number of issues listed for trading. A measurement of the number of issues advancing versus the number of issues declining on a given day or as a moving average. Many measurements are used: advances divided by declines, as a percentage, advances minus declines as a net positive or negative number. The measurement consistently followed is an insight into investor sentiment and is used extensively by market analysts.

Breadth Thrust

Martin Zweig developed this momentum indicator that illustrates a "thrust" when, during a 10 day period, the average number of issues that are advancing goes from below 40% to above 61.5%. This means the market went from being oversold to one of strength, but is not yet considered overbought.