Stock Market Definitions

Transcription

1 Stock Market Definitions Alpha Alpha is a mathematical measurement of the amount of return expected from an investment. Alpha measures a fund's performance after adjusting for the fund's systematic risk as measured by the fund's beta with respect to the index. It is the difference between the average excess return on the fund and the average excess return on the levered or de-levered index portfolio. The usefulness of alpha is completely dependent on the accuracy of beta. If the investor accepts beta as a conclusive definition of risk, a positive alpha would be a conclusive indicator of good fund performance. American Depositary Receipts Receipt for the shares of a foreign-based company held in the vault of a U.S. bank. Shareholders of ADRs are entitled to receive all dividends and capital gains. Individuals that want to own a foreign company without buying it on an overseas market can purchase an ADR listed on U.S. exchanges. Annual Percentage Yield Annual Percentage Yield (APY) is the effective annual rate of return taking into account the effect of compounding interest. The quoted rate assumes that the funds will remain in the investment for a full year (365 days). While similar to an APR (Annual Percentage Rate) it allows you to standardize different types of rates into an annualized percentage rate number. Appreciation Increase in value of an asset such as a stock, bond, commodity or real estate. Ask The ask price is the price at which a market maker or broker offers to sell a security or commodity. The price another market maker or broker is willing to pay for that security is called the bid price, and the difference between the two prices is called the spread. Bid and ask prices are typically reported to the media for commodities and over-the-counter (OTC) transactions. Asset Allocation Asset allocation refers to the way your investments are diversified across different asset classes, such as stocks, bonds and cash, to meet your goals given your risk tolerance, tax status and time horizon. Esentially, asset allocation means dividing your assets among different broad categories of investments, called asset classes. Stock, bonds, and cash are examples of asset classes, as are real estate and derivatives such as options and futures contracts. Most financial services firms suggest particular asset allocations for specific groups of clients and fine-tune those allocations for individual investors. The asset allocation model -- specifically the percentages of your investment principal allocated to each investment category you're using -- that's appropriate for you at any given time depends on many factors, such as the goals you're investing to achieve, how much time you have to invest, your tolerance for risk, the direction of interest rates, and the market outlook. Scottrade offers five pre-defined asset allocation models, called target models, that you can use as a

2 framework for structuring your portfolio. Our target models can be found when you log in to your account, go to the My Account tab and choose Portfolio Manager from the left menu. Ideally, you adjust or rebalance your portfolio from time to time to bring the allocation back in line with the model you've selected. Or, you might realign your model as your financial goals, your time frame, or the market situation changes. Basis Point Measurement used to quote bonds. One basis point is equal to 0.01%, or one one-hundredth of one percent. 100 basis points is equal to 1%, whereas 50 basis points would equal one half percent, or 0.50%. Basket A unit or group of securities. ETFs are some times referred to as baskets. Bear Market A bear market is sometimes described as a period of falling securities prices and sometimes, more specifically, as a market where prices have fallen 20% or more from the most recent high. A bear market in stocks is triggered when investors sell off shares, generally because they anticipate worsening economic conditions and falling corporate profits. A bear market in bonds is usually the result of rising interest rates, which prompts investors to sell off older bonds paying lower rates. Benchmark A standard index used for measuring the performance of an investment. The goal of most money managers and investors is to outperform their respective benchmark. Beta A volatility measurement of a fund or stock versus the Standard & Poor's 500 Stock Index. A fund or stock with a higher beta than the Standard & Poor's 500 will rise or fall greater. To the contrary, a stock or a fund with a low beta will rise or fall less. Bid The bid price is the price a market maker or broker is willing to pay for a security or commodity. The price at which another market maker or broker is willing to sell that security is called the ask price, and the difference between the two prices is called the spread. Bid and ask prices are typically reported to the media for commodities and over-the-counter (OTC) transactions. Blue Chip A term used to describe a well established, financially sound, nationally recognized company. Blue chips have a history of weathering economic downturns and maintaining stable growth. Bond A debt instrument issued by corporations and governments to raise capital. Interest on the outstanding debt is paid to bondholders at specific intervals, with the principal amount of the loan paid on the bond maturity date.

3 Broker A company or individual who buys and sells property (in the stock market, executes buy and sell orders) on behalf of clients. Brokers may charge a fee or commission for facilitating the transaction. Because most brokerage firms make transactions as both a broker (on behalf of clients) and a dealer (on its own behalf), most brokerages are referred to as broker-dealers. Bull Market A prolonged period when stock prices as a whole are moving upward is called a bull market, although the rate at which those gains occur can vary widely from bull market to bull market. The duration of a bull market, the severity of the falling market that follows, and the time that elapses until the next upturn are also different each time. Well-known bull markets began in 1923, 1949, 1982, and Capital Gain When you sell an asset at a higher price than you paid for it, the difference is your capital gain. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total. If you own the stock for more than a year before selling it, you have a long-term capital gain. If you hold the stock for less than a year, you have a short-term capital gain. Capital Loss When you sell an asset for less than you paid for it, the difference between the two prices is your capital loss. For example, if you buy 100 shares of stock at $30 a share and sell when the price has dropped to $20 a share, you will realize a capital loss of $10 a share, or $1,000. Cash Dividend A distribution of earnings to shareholders, prorated by class of security and paid in the form of cash. Certificate of Deposit Debt instrument issued by a bank that usually pays interest. Maturities range from a few weeks to several years. Interest rates are set by competitive forces in the marketplace. Change ($/%) The intraday dollar or percentage change in price for a security can be used to evaluate a security's performance for the current market day. On the Watch Lists table of your account homepage, click the dollar sign ($) to view price change in dollars or the percent symbol (%) to view price change as a percentage. Commission Transaction fee paid to a broker for executing a securities trade. Commission amounts vary and are often dependent on the size of trade, the frequency of trades, and sometimes the size of the brokerage account. Discount brokers tend to charge lower commissions for trades versus full service brokers. Compound Interest Compound interest is interest that accrues on the original principal amount invested as well as the accumulated interest of the investment over time.

4 Coupon Interest rate on a debt security the issuer promises to pay to the holder until maturity, expressed as an annual percentage of face value. Coupon Rate Interest rate on a debt security the issuer promises to pay to the holder until maturity, expressed as an annual percentage of face value. Date of Maturity The date of maturity, or maturity date, is the day on which a bond's term ends, and its issuer repays the principal and makes the final interest payment. When the phrase is used in connection with mortgages or other personal loans, the date of maturity is the day your last payment is due and your debt is repaid. Debt Instruments Written promise to repay a debt; for instance, a bill, note, bond, certificate of deposit or commercial paper. Diversification Diversification is a technique that involves investing in several different asset classes and a variety of securities within each class to help reduce the impact of volatility in your portfolio and assist you in managing risk. Diversifying your portfolio is a two-step process. Step One: Diversify your investments across different asset classes, such as stocks, bonds and cash. This part of diversification is called asset allocation and is sometimes referred to as horizontal diversification. Step Two: Include a variety of investments within each asset class and market segment to diversify your holdings according to your investment strategy. This part of diversification is sometimes referred to as vertical diversification. To achieve a diversified portfolio, you need to complete both steps in the diversification process. Dividend A distribution of earnings to shareholders, prorated by class of security and most commonly paid in the form of cash or stock. The amount is decided by the board of directors and is usually paid quarterly. Dividends must be declared in the year they are received. Dividend Yield The distribution rate of a fund calculated by dividing the amount of the dividends per share by the per share market price of the fund. For example, a fund price of $20 that pays a $2 dividend per year has a 10% dividend yield.

5 Dollar-Cost Averaging Dollar-cost averaging (DCA) is a method of accumulating assets by investing a fixed amount of dollars in securities at set intervals, regardless of the share price. Dow Jones Industrial Average The DJIA is a widely followed index that is used as a barometer of stock market performance. This stock index is based upon 30 major companies, or components in diversified industries, such as banking, consumer staples, retail, healthcare, and technology. Earned Income Income (especially wages and salaries) generated by providing goods or services. Also includes annuity income. Earnings Per Share Earnings per share (EPS) is calculated by dividing a company's total earnings by the number of outstanding shares. For example, if a company earns $100 million in a year and has 50 million outstanding shares, the earnings per share are $2. Earnings per share can also be calculated on a fully diluted basis, by adding outstanding stock options, rights, and warrants to the outstanding shares. The results report what EPS would be if all of those options, rights, and warrants were exercised and the company had to issue more shares to meet its obligations. Earnings and other financial measures are provided on a per share basis to make it easier for you to analyze the information and compare the results to those of other investments. Equity 1. Equity is another word for stock or any security representing an ownership interest. 2. Equity is total assets minus total liabilities Ex-Date The Ex-Date, or Ex-Dividend Date, is the first day that a stock trades without entitlement to the next dividend. The ex-date is typically two business days prior to the record date which companies use to determine who should receive the dividend. In order to receive a dividend from a paying company, you must buy the stock prior to the exdate. You may sell the stock any time on or after the ex-date and still receive the dividend, since you would be selling the stock without the dividend rights. The ex-date is usually the second business day before the date of record. Ex-Dividend The period in which the stock is considered to be trading without dividend. Commonly the interval between the ex-date and the declaration date of the next dividend announcement. An investor who buys shares during that interval is not entitled to the dividend. Typically, a stock's price moves up by the dollar amount of the dividend as the ex-dividend date approaches, then falls by the amount of the dividend after that date.

6 Exchange A marketplace, physical or electronic, in which securities, commodities, derivatives and other financial instruments are traded. Exchanges ensure the fair and orderly exchange of financial products. Exchange-Traded Fund ETFs are an emerging class of low-cost index funds that trade like stocks. Inexpensive, taxefficient, and flexible, they offer investors instantaneous exposure to local or global indexes via a single trade. Sometimes referred to as "tracking stocks." Face Value Value of a bond, note, mortgage or other security as given on the certificate or instrument. May also be referred to as par value or nominal value. First In, First Out (FIFO) A method of accounting in which the first acquired shares are sold first. Gain/Loss ($/%) The total dollar and percentage change between a security's cost and its last quoted price. Gain/Loss amount is calculated by multiplying the symbol's Last Price by the Quantity and then subtracting the symbol's Cost. Gain/Loss percentage is calculated by dividing the Gain/Loss amount by the symbol's Cost. High The highest price at which a security has been traded during the current trading day is commonly referred to as the security's high. Index A statistical measure used to track the aggregate performance of stock, bond, and commodities markets. Widely followed indexes include those developed and managed by Standard & Poor's, Russell, and Dow Jones. Index Fund A mutual fund or ETF that seeks to match the exact performance of a specific market or benchmark index. Index funds are sometimes referred to as passive funds, and are popular for their tax efficiency and low fees. Popular index funds include those that track the S&P, Russell, and Dow Jones indices. Indicators Mathematical calculations used to measure current conditions and security performance and to forecast future trends. Technical analysis indicators include moving averages and Fibonacci studies, while fundamental analysis indicators include unemployment rates and the Consumer Price Index (CPI). Inflation Risk Chance that the value of assets or of income will be eroded as inflation shrinks the value of a country's currency.

7 Initial Public Offering Corporation's first offering of stock to the public. IPOs are almost invariably an opportunity for the existing investors and participating venture capitalists to make big profits, since for the first time their shares will be given a market value reflecting expectations for the company's future growth. Interest Cost of using money, expressed as a rate per period of time, usually one year. Interest Rate Rate of interest charged for the use of money, usually expressed at an annual rate. The rate is derived by dividing the amount of interest by the amount of principal borrowed. Investment Grade Bonds whose issuers are rated AAA to BBB by Standard & Poor's or Moody's Investors Service for safety and ability to repay principal. Joint Account An account established for two or three people, owned jointly. Large Cap Refers to companies with a market capitalization over $5 billion. Last In, First Out (LIFO) A method of accounting in which the shares acquired most recently are sold first. Liquid Assets Refers to cash or items easily convertible to cash. Some examples: money-market fund shares, U.S. Treasury bills, bank deposits. Liquidation Converting investment securities to cash. Liquidity Ability to rapidly buy or sell an asset without substantially affecting the asset's price. ETFs with limited trading activity are generally not considered liquid because a large buy or sell order can dramatically impact the price and volatility. Liquidity also refers to the relative ease with which an asset can be converted into cash. Long-Term Capital Gain (or Loss) When you sell a capital asset that you have owned for more than a year at a higher price than you paid to buy it, any profit on the sale is considered a long-term capital gain. If you sell for less than you paid to purchase the asset, you have a long-term capital loss. Unlike short-term gains, which are taxed at your income tax rate, most long-term gains on most investments, including real estate and securities, are taxed at rates lower than the rates on ordinary income. Currently, those rates are 15% if you're in the 25% tax bracket or higher and 5% if you are in the 10% or 15% bracket.

8 You can deduct your long-term losses from your long-term gains, and your short-term losses from your short-term gains, to reduce the amount on which potential tax may be due. You may also be able to deduct up to $3,000 in accumulated long-term losses from your ordinary income and carry forward losses you can't use in one tax year to deduct in the next tax year. Low The lowest price at which a security traded during the current trading day is commonly referred to as the security's low. Market Capitalization Market capitalization is calculated by taking the total shares outstanding multiplied by the current market price of one share. This value is used when designing a portfolio strategy as a basis for risk/return and asset allocation parameters. Market Value Market value is the total value of a trade. Market value is typically calculated as: Current Price X Quantity = Market Value. To create a virtual trading experience, the Watch Lists table of your account home page calculates market value as the last price times the quantity of shares you have entered for a watch list symbol. Maturity Reaching the date at which a debt instrument is due and payable. Mid Cap Refers to companies with a market capitalization between $1 billion and $5 billion. Money Market A mutual fund that sells its shares to purchase short-term securities. Income from the purchase is distributed among fund shareholders, often via additional shares in the fund. Moody's Investors Service, Inc. Moody's is a financial services company best known for rating investments. Moody's rates bonds, common stock, commercial paper, municipal short-term bonds, preferred stocks, and annuity contracts. Its bond rating system, which assigns a grade from Aaa through C3 based on the financial condition of the issuer, has become a world standard Mutual Fund A mutual fund is a professionally managed investment product that sells shares to investors and pools the capital it raises to purchase investments. A fund typically buys a diversified portfolio of stock, bonds, and money market securities, or a combination of stock and bonds, depending on the investment objectives of the fund. Mutual funds may also hold other investments, such as derivatives. A fund that makes a continuous offering of its shares to the public and will buy any shares an investor wishes to redeem, or sell back, is known as an open-end fund. An open-end fund trades at net asset value (NAV). The NAV is the value of the fund's portfolio plus money waiting to be invested, minus operating expenses, divided by the number of outstanding shares.

9 A fund that sells its shares to the public only until sales reach a predetermined level is known as a closed-end fund. The shares of a closed-end fund trade in the marketplace the way common stock does. Load funds -- those that charge upfront or back-end sales fees -- are sold through brokers or financial advisers. All mutual funds charge management fees, though at different rates, and they may also levy other fees and charges, which are reported as the fund's expense ratio. These costs plus the trading costs, which aren't included in the expense ratio, reduce the return you realize from investing in the fund. NASDAQ National Association of Securities Dealers Automated Quotations is a computerized system that quotes securities traded over the counter and on other exchanges. Net Change The difference between the closing price of a stock, bond, or mutual fund, or the last price of a commodity contract, and the closing price on the previous day is reported as net change. It may also simply be referred to as change. When a stock has gained in value, the positive net change is expressed with a plus sign and a number, such as +0.50, meaning that the price was up 50 cents from the previous trading day. On days that a stock falls, the negative net change is expressed with a minus sign and a number, such as -1, meaning that the price was a dollar lower. Net Earnings Net earnings, also known as retained earnings, are a corporation's profits after paying all of its expenses. This money is available to pay dividends on common stock, make acquisitions or expand operations without incurring debt or issuing additional stock, or buy back outstanding shares. New York Stock Exchange The oldest and largest stock exchange in the U.S. An unincorporated association governed by a board of directors, which is headed by a full-time chairman and is composed of 24 individuals representing the public and the exchange membership in about equal portion. Trading hours occur between 9:30 a.m. and 4 p.m. ET, Monday through Friday, excluding market holidays Ordinary Dividend Ordinary (taxable) dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of a corporation and are considered ordinary income. This means they are not capital gains. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend. Over-the-Counter Securities that trade over-the-counter (OTC) are not listed on an organized stock exchange, such as the New York Stock Exchange (NYSE) or the NASDAQ. Common stocks, corporate, government, and municipal bonds (munis), money market instruments, and other products, such as forward contracts and certain options, may trade OTC.

10 Payable Date Date on which a declared stock dividend or a bond interest payment is scheduled to be paid. Penny Stock Stocks that trade for less than $1 a share are often described as penny stocks. Penny stocks change hands over-the-counter (OTC) and tend to be extremely volatile. Their prices may spike up one day and drop dramatically the next. Previous Close The final price at which a security traded on the previous trading day is referred to as the security's previous close. Price-to-Earnings Ratio The price-to-earnings ratio (P/E) is the relationship between a company's earnings and its share price, and is calculated by dividing the current price per share by the earnings per share. A stock's P/E, also known as its multiple, gives you a sense of what you are paying for a stock in relation to its earning power. For example, a stock with a P/E of 30 is trading at a price 30 times higher than its earnings, while one with a P/E of 15 is trading at 15 times its earnings. If earnings falter, there is usually a sell-off, which drives the price down. But if the company is successful, the share price and the P/E can climb even higher. Similarly, a low P/E can be the sign of an undervalued company whose price hasn't caught up with its earnings potential. Conversely, a low P/E can be a clue that the market considers the company a poor investment risk. Stocks with higher P/Es are typical of companies that are expected to grow rapidly in value. They're often more volatile than stocks with lower P/Es because it can be more difficult for the company's earnings to satisfy investor expectations. The P/E can be calculated two ways. A trailing P/E, the figure reported in newspaper stock tables, uses earnings for the last four quarters. A forward P/E generally uses earnings for the past two quarters and an analyst's projection for the coming two. Prospectus Required by securities laws and issued by mutual fund companies and ETFs, the prospectus is a legal document that discloses the investment objectives of the fund, operating history, fund management, management fees, portfolio holdings, and other related financial data. Brokers are required to give a prospectus to investors before they invest. Qualified Dividend For dividends to be considered qualified, they have to be absent from the IRS unqualified dividend list, and the underlying stock that pays the dividend must be held for a holding period specified by the IRS. That holding period is defined as "more than 60 days during the 120-day period beginning 60 days before the ex-dividend date". For preferred stock, the holding period is "90 days during the 180-day period beginning 90 days before the stock's ex-dividend date".

11 Quantity The number of shares or contracts traded on a security defines the quantity of a trade. Realized Gain When you sell an investment for more than you paid, you have a realized gain. For example, if you buy a stock for $20 a share and sell it for $35 a share, you have a realized gain of $15 a share. In contrast, if the price of the stock increases, and you don't sell, your gain is unrealized, or a paper profit. Realizing your gains means you lock in any increase in value, which could potentially disappear if you continued to hold the investment. But it also means you may owe tax on that profit when you sell unless the investment is tax exempt or you hold it in a tax-deferred or tax-free account. In a tax-deferred account, you can postpone paying the tax until you begin withdrawing from the account. However, if taxes are due and you have owned the investment for more than a year when you sell, you pay tax at the long-term capital gains rate, which, for most types of investments, is lower than the rate at which you pay federal income tax on ordinary income Record Date Date on which a shareholder must officially own shares in order to be entitled to a dividend. REIT Real Estate Investment Trust. REITs allow investors to invest in real estate, either through properties and mortgages, with a higher degree of liquidity because REITs sell on major exchanges like stock. Return on Investment (ROI) A way to measure the performance of an investment. The formula for calculating ROI is (Gain from Investment - Cost of Investment) / Cost of Investment. The result is expressed as a percentage or ratio. The higher the ROI, the better the performance of the investment. Risk Risk is the probability that the performance of an investment will differ from its expected return. See also: Risk-and-return tradeoff. S&P 500 Standard & Poor's (S&P) is a company that rates stocks and bonds according to risk. The S&P 500 is an index of 500 stocks chosen by S&P to represent the risk and return of large cap companies overall in the market. It is widely acknowledged as a leading indicator of U.S. equities.

12 S&P Capital IQ Stock Ranking 5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. 4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. 2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain. 1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis. Relevant benchmarks: In North America, the relevant benchmark is the S&P 500 Index, in Europe and in Asia, the relevant benchmarks are generally the S&P Europe 350 Index and the S&P Asia 50 Index. Shares Outstanding The total number of shares held by the public plus any restricted shares held by officers and insiders at a company. If a company repurchases a portion of its shares, these are not considered outstanding. Simple Interest Interest calculation based only on the original principal amount. Small Cap Refers to companies with a market capitalization between $300 million and $2 billion. Stock A type of security indicating partial ownership of a corporation. Owners of stock are entitled to claim a portion of the company's assets and earnings. Stock Certificate Evidence of ownership of a corporation showing the number of shares, name of issuer, amount of par or stated value represented or a declaration of no-par value, and rights of the shareholder. A preferred stock certificate will also list the issuer's responsibilities with respect to dividends and voting rights, if any.

13 Stock Dividend A distribution of earnings to shareholders, prorated by class of security and paid in the form of stock. Stock Split Increase in a corporation's number of outstanding shares of stock without any change in the shareholder's equity or aggregate market value at the time of the split. Today's Change The intraday change in a security's market value is often referred to as today's change. Today's Change is typically calculated as the current day's market value - the previous day's market value. To create a virtual trading experience, the Watch Lists table of your account home page calculates Today's Change as the quantity of shares times the dollar change of a security for the most recent trading day. This value represents the total market dollar change in a security for the current trading day. Total Cost Is calculated as: (Quantity * Purchase Price) + Commission TTM Trailing twelve month average (usually weighted) Turnover Relates to the frequency with which a money manager is buying and selling securities within a fund portfolio. High turnover translates into higher trading costs, which fund investors must pay. Low portfolio turnover is better because it lessens the impact of trading and tax related costs. Volatility The term volatility indicates how much and how quickly the value of an investment, market, or market sector changes. For example, because the stock prices of small, newer companies tend to rise and fall more sharply over short periods of time than stock of established, blue-chip companies, small caps are described as more volatile. The volatility of a stock relative to the overall market is known as its beta, and the volatility triggered by internal factors, regardless of the market, is known as a stock's alpha. Volume Volume is the number of shares traded in a company's stock or in an entire market over a specified period, typically a day. Unusual market activity, either higher or lower than average, is typically the result of some external event. Year-To-Date Performance The YTD performance of a security details how the security has performed in the market from the start of the calendar year up until the most current date.

14 Yield Yield is the rate of return on an investment expressed as a percent. Yield is usually calculated by dividing the amount you receive annually in dividends or interest by the amount you spent to buy the investment. In the case of stocks, yield is the dividend you receive per share divided by the stock's price per share. With bonds, it is the interest divided by the price you paid. Current yield, in contrast, is the interest or dividends divided by the current market price. In the case of bonds, the yield on your investment and the interest rate your investment pays are sometimes, but by no means always, the same. If the price you pay for a bond is higher or lower than par, the yield will be different from the interest rate. For example, if you pay $950 for a bond with a par value of $1,000 that pays 6% interest, or $60 a year, your yield is 6.3% ($60 / $950 = ). But if you paid $1,100 for the same bond, your yield would be only 5.5% ($60 / $1,100 = ). 52-Week High The highest price at which a security traded during the previous 52 weeks is called the security's 52-week high. 52-Week Low The lowest price at which a security traded during the previous 52 weeks is called the security's 52-week low.