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COMMON TERMS IN TRADING / INVESTING
Above the Market
An order to buy or sell at a price set higher than the current market price of the security. Examples of above the market orders include: a limit order to sell, a stop order to buy, or a stop-limit order to buy.This is a strategy that is often used by momentum traders. For example, a stop order would be placed above the resistance level to buy. Should the security's price break through the resistance level, the investor may be able to participate in the upward trend.
Absolute Breadth Index - ABI
A market indicator used to determine volatility levels in the market without factoring in price direction. It is calculated by taking the absolute value of the difference between the number of advancing issues and the number of declining issues. Typically, large numbers suggest volatility is increasing which is likely to cause significant changes in stock prices in the coming weeks.This tool is classified as a breadth indicator because the number of advancing/declining values are the only values used to create it. This index can be calculated using any exchange, or a subset of an exchange.
An investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions. Active investing is highly involved. Unlike passive investors, who invest in a stock when they believe in its potential for long-term appreciation, active investors will typically look at the price movements of their stocks many times a day. Typically, active investors are seeking short-term profits.
Adding To A Loser
The action of a trader/investor increasing a position in an asset when its price is heading in the direction that's opposite to what the investor/trader desires. This is generally not a wise investment decision because unless the asset begins to move in the desired direction, the investor's losses will increase.An investor might add to a losing position instead of closing it because he or she gets emotionally attached to the asset and has a hard time accepting that it was a bad investment. Once the trade moves substantially in the wrong direction, however, it may be time to consider closing out or re-evaluating the reason for having the position rather than putting more money at risk.
A technical analysis tool that represents the total difference between the number of advancing and declining security prices. This index is considered one of the best indicators of market movements as a whole. In general, rising values of the advance/decline can be used to confirm the likelihood that an upward trend will continue. If the market is up but there are more declining issues than advancing ones, it's usually a sign that the market is losing its breadth and may be getting ready to change direction.
The effect of complex and extensive accounting rules that regulate financial statement reporting and are thought to distort a company's true operating performance.Accounting noise can be seen as either a consequence of necessary rules regarding generally accepted accounting principles or a result of management's attempts to massage the numbers to present a rosier financial picture of the firm.For example, a company that has recently undergone a significant merger may look very unprofitable on the income statement; because the merger may cause serious one-time charges for the company, it may be useful for investors to cut through the accounting noise to get a more accurate picture of the company's prospects. Conversely, an underperforming company could engage in earnings manipulation, creating accounting noise to hide its poor performance.
Air Pocket Stock
When the price of a stock plunges unexpectedly, similar to an airplane when it hits an air pocket.This is almost always caused by shareholders selling because of unexpected bad news.
A type of investor who attempts to profit from price inefficiencies in the market by making simultaneous trades that offset each other and capture risk-free profits. An arbitrageur would, for example, seek out price discrepancies between stocks listed on more than one exchange, buy the undervalued shares on the one exchange while short selling the same number of overvalued shares on the other exchange, thus capturing risk-free profits as the prices on the two exchanges converge. Arbitrageurs are typically very experienced investors since arbitrage opportunities are difficult to find and require relatively fast trading. Arbitrageurs also play an important role in the operation of capital markets, as their efforts in exploiting price inefficiencies keep prices more accurate than they otherwise would be.
An incorrectly valued stock that is attractive because its combined asset value is greater than its market capitalization.
This type of stock is called an asset play because the impetus for purchase is the fact that the company's assets are being offered to the market relatively cheap. Typically, investors involved in an asset play will buy these stocks in hopes that there will be price corrections causing the market capitalization to increase and thus lead to a capital gain.
A price movement through an identified level of support or resistance, which is usually followed by heavy volume and increased volatility. Traders will buy the underlying asset when the price breaks above a level of resistance and sell when it breaks below support. In practice, a breakout is most commonly used to refer to a situation where the price breaks above a level of resistance and heads higher, rather than breaking below a level of support and heading lower. Once a resistance level is broken, it is regarded as the next level of support when the asset experiences a pullback Most traders use chart patterns and other technical tools such as trendlines to identify possible candidates that are likely to break through a support/resistance level.
An investor who looks for bargains among stocks whose prices have recently dropped dramatically. The investor believes that the recent price drop is temporary and a recovery is soon to follow.A bottom fisher attempts to find stocks that the market has undervalued. Unfortunately, it's difficult to tell the difference between a bargain and a stock that has fallen for a fundamental reason.
An economic cycle characterized by rapid expansion followed by a contraction.A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.A theory that security prices rise above their true value and will continue to do so until prices go into freefall and the bubble bursts.Bubbles form in economies, securities, stock markets and business sectors because of a change in the way players conduct business. This can be a real change, as occurred in the bubble economy of Japan in the 1980s when banks were partially deregulated, or a paradigm shift, as happened during the dotcom boom in the late '90s and early 2000s. During the boom people bought tech stocks at high prices, believing they could sell them at a higher price until confidence was lost and a large market correction, or crash, occurs. Bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved again, causing prices to deflate. Thus, there is little long-term return on those assets.
A situation where, in an attempt to make a short-term profit, a broker confirms an order to a client without actually executing it. A brokerage which engages in unscrupulous activities, such as bucketing, is often referred to as a bucket shop.If the eventual price that the order is executed at is higher than the price available when the order was submitted, the customer simply pays the higher price. On the other hand, if the execution price is lower than the price available when the order was submitted, the customer pays the higher price and the brokerage firm pockets the difference.
investment style that goes against prevailing market trends by buying
assets that are performing poorly and then selling when they perform
well.A contrarian investor believes that the people who say the market
is going up do so only when they are fully invested and have no further
purchasing power. At this point, the market is at a peak. On the other
hand, when people predict a downturn, they have already sold out, at
which point the market can only go up.Contrarian investing also
emphasizes out-of-favor securities with low P/E ratios.
reverse movement, usually negative, of at least 10% in a stock, bond,
commodity or index. Corrections are generally temporary price declines,
interrupting an uptrend in the market or asset.A healthy market will
correct from time to time.
idea presented in response to the Kyoto Protocol that involves the
trading of greenhouse gas (GHG) emission rights between nations.For
example, if Country A exceeds its capacity of GHG and Country B has a
surplus of capacity, a monetary agreement could be made that would see
Country A pay Country B for the right to use its surplus capacity. The
Kyoto Protocol presents nations with the challenge of reducing
greenhouse gases and storing more carbon. A nation that finds it hard
to meet its target of reducing GHG could pay another nation to reduce
emissions by an appropriate quantity.
A military term. Capitulation refers to surrendering or giving up. In
the stock market, capitulation is associated with "giving up" any
previous gains in stock price as investors sell equities in an effort
to get out of the market and into less risky investments. True
capitulation involves extremely high volume and sharp declines. It
usually is indicated by panic selling.After capitulation selling, it is
thought that there are great bargains to be had. The belief is that
everyone who wants to get out of a stock, for any reason (including
forced selling due to margin calls), has sold. The price should then,
theoretically, reverse or bounce off the lows. In other words, some
investors believe that true capitulation is the sign of a bottom.
that initiates or causes an important event to happen. Originally a
term used in chemistry for the volatile (active) chemical in a
formula.Quite often you will hear someone say that a stock needs a
catalyst. This means that the stock needs some good news or a press
release to get people interested in the stock again.
way to say, "let the buyer beware."In other words, consumers need to
know their rights and be vigilant in avoiding scams.
Chasing the Market
or exiting of a trend after the trend has already been well
established. Investors are often unaware of the fact that they are
chasing the market which can dent the value of a portfolio. This type
of investing is often seen as irrational as decisions are often based
on emotion instead of careful analysis of the value of the
investment.Chasing the market refers to both the entering into highly
priced positions after they have rapidly increased and become
overvalued as well as the exiting of positions after they have rapidly
decreased and become undervalued. During the internet bubble some
investors entered the rapidly appreciating sector well after the trend
had been established and lost considerable sums when the bubble bust.
fraudulent trading scheme where sell orders are entered by a broker who
knows that offsetting buy orders, the same number of shares at the same
time and at the same price, either have been or will be entered.These
trades do not represent a real change in the beneficial ownership of
investment strategy where investors mimic the trades of well-known and
historically successful investors. This copycat investing can be very
good - why not follow the best? This investing strategy works the best
when the money manager or institution being mimicked buys companies
with a buy and hold mentality. If the manager is buying the company
for a short period of time, the delay between the purchase and the
release of the information to the public may render the particular
purchase a bad one. However, many money managers buy companies with a
buy and hold mindset, including the most successful one of all, Warren
market that is believed to have the potential to make a strong move in
one direction after being pushed in the opposite direction. The idea is
that if a market should be headed in one direction based on its
fundamentals but is pushed in the other direction, it will eventually
make a strong move in the original fundamental direction. This coiled
move will often be more substantial than what might have been the case
if it had gone in the expected direction to begin with.Coiled markets
often arise when the market has been held down artificially. This
happens in commodities markets, such as gold and silver. Investors
looking to capitalize on coiled markets will use both fundamental and
technical analysis to identify markets or specific equities that
exhibit the characteristics of a coiled market. The origins of this term relate to the physics of a coiled spring: the more it is compressed, the greater the rebound will be.
Corner A Market
To acquire enough shares of a particular security in order to manipulate its price. This
is why people with significant interest in a particular stock are
watched very closely by the Securities and Exchange Commission.
is a general term used in many different instances. For instance, an
investors that recently puchased a security will have to cover the
puchase by depositing the necessary funds. Or, an investor may wish to
cover his/her short position by purchasing the stock. Or, a portfolio
manager may wish to cover his/her risk exposure by buying an offsetting
Dead Cat Bounce
temporary recovery from a prolonged decline or bear market, after which
the market continues to fall.Ever heard the saying, "Even a dead cat
will bounce if dropped from high enough!"?
term that refers to the Bombay Stock Exchange, the major stock exchange
in India. The street is home not only the Bombay Stock Exchange but
also a large number of other financial institutions.The term "Dalal
Street" is used in the same way as "Wall Street" in the U.S., referring
to the country's major stock exchanges and overall financial system.
These terms are often seen in the financial media.
trading of shares when a declared dividend belongs to the seller rather
than the buyer.A stock trades ex-dividend on or after the ex-dividend
of stock that are trading but no longer have rights attached because
they have either expired, been transferred to another investor or been
exercised. The rights originally assigned to the stockholder are, for
whatever reason, no longer valid or no longer applicable to the
stock.Ex-rights shares are worth less than shares which are not yet
ex-rights - the ex-rights shares do not give a shareholder access to a
rights offering. Renounceable rights may trade separately, allowing
shareholders to choose to sell their rights rather than exercise them.
Eat Well, Sleep Well
adage that, referring to the risk/return trade-off, says that the type
of security an investor chooses depends on whether he or she wants to
eat well or sleep well.Investing in high-risk, high-reward securities
will offer you the potential to eat well, but the risky nature of these
securities might prevent you from sleeping at night. By contrast,
investing safely means that you will sleep well, but the low rate of
return may keep you from eating well.
Eat Your Own Dog Food
expression describing the act of a company using its own products for
day-to-day operations. A company that eats its own dog food sends the
message that it considers its own products the best on the market.This
slang was popularized during the dotcom craze when some companies did
not use their own products and thus could "not even eat their own dog
food". An example would've been a software company that created
operating systems but used its competitor's software on its corporate
break between prices on a chart that occurs when the price of a stock
makes a sharp move up or down with no trading occurring in between.
Gaps can be created by factors such as regular buying or selling
pressure, earnings announcements, a change in an analyst's outlook or
any other type of news release.
1. The difference between prices at which a market maker can buy and sell a security.
The percentage by which an asset's market value is reduced for the
purpose of calculating capital requirement, margin and collateral
3. The term haircut comes from the fact that market makers can trade at such a thin spread.
When they are used as collateral, securities will generally be devalued
since a cushion is required by the lending parties in case the market
percentage of the purchase price of securities (that can be purchased
on margin) that the investor must pay for with his or her own cash or
marginable securities. Also called the "initital margin requirement".
For futures contracts, initial margin requirements are set by the
brokerage account in which the broker lends the customer cash to
purchase securities. The loan in the account is collateralized by the
securities and cash. If the value of the stock drops sufficiently, the
account holder will be required to deposit more cash or sell a portion
of the stock. In a margin account, you are investing with your broker's
money. By using leverage in such a way, you magnify both gains and
broker's demand on an investor using margin to deposit additional money
or securities so that the margin account is brought up to the minimum
maintenance margin. You would receive a margin call from a broker if
one or more of the securities you had bought (with borrowed money)
decreased in value past a certain point. You would be forced either to
deposit more money in the account or to sell off some of your assets.
securities position that is not hedged from market risk. Both the
potential gain and the potential risk are greater when a position is
naked instead of covered (a covered position is hedged from market
risk).If an investor simply holds 500 shares of SBI, he or she has a
naked position in SBI. If the investor wanted to cover this position,
he or she could buy put option contracts, which would help protect
against downward movements in the price of SBI shares.Whether to have a
naked position is rarely a concern for most small investors, but it is
a concern for large investment holders and institutions.
condition in which the price of an underlying asset has fallen sharply,
and to a level below which its true value resides. This condition is
usually a result of market overreaction or panic selling. A situation
in technical analysis where the price of an asset has fallen to such a
degree - usually on high volume - that an oscillator has reached a
lower bound. This is generally interpreted as a sign that the price of
the asset is becoming undervalued and may represent a buying
opportunity for investors. Assets that have experienced sharp declines
over a brief period of time are often deemed to be oversold.
Determining the degree to which an asset is oversold is very subjective
and could easily differ between investors.Identifying areas where the
price of an underlying asset has been unjustifiably pushed to extremely
low levels is the main goal of many technical indicators such as the
relative strength index, the stochastic oscillator, the moving average
convergence divergence and the money flow index.
act of holding an investment for too long. It often occurs when traders
attempt to time the market by identifying the end of a price trend and
the beginning of a new one, but, due to greed and fear, tend to
overstay their positions. This usually results in reduced gains or,
worse, further losses.Knowing when to sell or get out of an investment
is just as important as knowing when to get in. However, timing the
market correctly is a task that even professional investors and traders
find difficult to accomplish on a consistent basis, so attempting
market timing is not recommended for the average investor.
High volume buying brought about by sharp price increases.The main problem with panic buying is that investors are not evaluating fundamentals. Instead, they are blindly buying before prices rise even more.
A price level established as being significant either by the market's failure to penetrate it or when a sudden increase in volume accompanies the move through the price level.A technical indicator, the pivot price is similar to resistance or support levels. If the price is exceeded, a breakout is expected to occur.
The phenomenon by which the seller of a particular good, service, or security desires to maximize the selling price, while the buyer desires to minimize the purchasing price. Generally speaking, the greater the price tension within a particular market, the greater the bid-ask spread.Price tension tends to decrease liquidity and create price stickiness. If price tension is relatively large within a particular market or exchange, there will be larger bid-ask spreads. Sellers will be asking for more than what the vast majority of buyers are willing to pay, which will drastically reduce the number of exchanges made within the market. Having little liquidity in a given market exposes the investor to liquidity risk, which can result in drastic changes in the security's underlying value.
Wide-scale selling of an investment, causing a sharp decline in price. In most instances of panic selling, investors just want to get out of the investment, with little regard for the price at which they sell.The main problem with panic selling is that investors are selling in reaction to pure emotion and fear, rather than evaluating fundamentals. Almost every market crash is a result of panic selling. Most major stock exchanges use trading curbs and halts to limit panic selling, to allow people to digest any information on why the selling is occurring, and to restore some degree of normalcy to the market.
Pump And Dump
A scheme attempting to boost the price of a stock through recommendations based on false, misleading, or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company's stock, sell their position after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines. The victims of this scheme will often lose a considerable amount of their investment as the stock often falls back down after the process is complete. Traditionally, this type of scheme was done through the cold-calling of individuals but with the advent of the internet this illegal practice has become even more prevalent. Pump and dump schemes usually target micro- and small-cap stocks, as they are the easiest to manipulate. Due to the small float of these types of stocks it does not take a lot of new buyers to push a stock higher. Claims being made about how a stock is set to break out based on the next greatest thing or generate returns of hundreds or thousands of percent, should be met with a considerable amount of caution. It is important to always do your own research in a stock before making an investment.
The action of selling stock to cash in on a sharp rise. This action pushes prices down temporarily. When traders are profit taking, the implication is that there is an upward trend in the security.For example, in the media you might hear something like this: "Markets were down today as traders took some profits off the table." It's common for prices to retract to some extent even in bull markets.
A trader who hopes to make quick profits. Basically, another term for "speculator". A punter's approach is to speculate rather than invest. Thus, punters aren't concerned with the fundamentals of an investment; instead, they attempt to make a quick profit by selling to somebody else at a higher price. Punters speculate in any market, but especially like options, futures and forex because of the leverage.
A method of increasing a position size by using unrealized profits from successful trades to increase margin.An investor who is pyramiding uses excess margin from the increasing price of a security in his or her portfolio to purchase more of the same security. This is generally a slow method of increasing one's position size as the margin increases will permit successively smaller purchases.
Selling Into Strength
A proactive trading strategy carried out by selling out of a long or into a short position when the price of the asset being traded is still rising but is expected to reverse in price. Opposite of "buying into weakness". For example, say a trader believes ABB stock will rise above Rs 15.00 but expects it to reverse at Rs 15.75. If the trader buys ABB stock at Rs 5.00 and sells when the price hits a predetermined exit price of Rs 5.50, that trader would be selling into strength. Conversely, a short seller may sell into a rising price with the anticipation that the stock price will soon decline. Many traders will wait for confirmation of a change in price movement before reacting. However, by the time a reversal is confirmed, it may be too late and the trader may end up losing. Thus, by trading against the prevailing trend in the anticipation that it will soon reverse, the trader allows him- or herself a greater margin of safety. As the saying goes, "missed money is better than lost money"
A situation in which a lack of supply and an excess demand for a traded stock forces the price upward.Short squeezes occur more often in smaller cap stocks with small floats. If a stock starts to rise rapidly, the trend may continue to escalate because the short sellers will likely want out. For example, say a stock rises 15% in one day, those with short positions may be forced to liquidate and cover their position by purchasing the stock. If enough short sellers buy back the stock, the price is pushed even higher.
An investment that does not provide dividends or interest to the investor. In a sterile investment, the return is generated completely by capital gains. Investing in gold or silver is a good example of a sterile investment.
A situation in which stock price changes little over a period of time. Consequently, traders who follow trends when making their investment decisions will tend to perform poorly during a sideways market.Also known as "horizontal price movement" or "flat market."
Abbreviations that refer to the settlement date of security transactions. The T stands for transaction date, which is the day the transaction takes place. The numbers 1, 2 or 3 denote how many days after the transaction date the settlement or the transfer of money and security ownership takes place. For determining the settlement date the only days that are counted are those on which the stock market is open. T+1 means that if a transaction occurs on a Monday, settlement must occur by Tuesday. Likewise, T+3 means that a transaction occurring on a Monday must be settled by Thursday, assuming no holidays occur between these days. But if you sell a security with a T+3 settlement date on a Friday, ownership and money transfer does not have to take place until the following Wednesday. Do not, however, think of the period between transaction and settlement as a flex time in which you can back out of the deal. The deal is done on the transaction day--it's just the transfer that does not take place until later. Currently we ae in T+2 settlement.
Tape Is Late
A situation on the trading floor where trading volume is so heavy that the real-time ticker quotes are delayed by a minute or two. When the tape is late some price or volume digits will be deleted.The term comes from years ago when the "tape" was actually paper and the printer couldn't keep up with trading activity. In the modern stock market this isn't as much of an issue because data is generally delivered electronically.
Tip from a Dip
Advice from a person who claims to have inside information, such as substantially higher than expected earnings or government approval of corporate mergers, that will materially impact a stock's price but actually doesn't.Sometimes referred to as a "tipster" or "tipper", these personalities should be avoided at all costs. Government regulations prevent persons with material insider information, such as corporate executives and board members, from disclosing their knowledge to family members, friends, or other persons for the purpose of profiting off virtually guaranteed changes in a stock's price once the news hits the street; anyone with decent insider information is effectively prevented from profiting from it on the open market
A common occurrence in which stock prices tend to be negative Friday through Monday.Simply put, this is the tendency of stock prices to fall over the weekend
Relatively low-risk stocks from well-known firms that pay high dividends.Widow-and-Orphan stocks are generally chosen during bear markets and ignored during bull markets. This is because these companies are perceived to be able to maintain their dividend payment schedule through difficult financial times.
SOURCE - WWW.INVESTOPEDIA.COM
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