Trading Glossary

Knowing the terms in this trading glossary are important to understanding the stock market, and ultimately, to your trading success. Our goal in coming up with this glossary of trading terms was to offer definitions for those stock market terms most frequently encountered by traders and/or used in our bi-weekly updates. If we’ve done our job right, you’ll come away with a little better understanding of the stock market and become a better trader.

Accumulation

A term indicating buying interest on the part of large institutional investors.

Advance-Decline line

The line that is created when you subtract the number of declining issues from advancing issues. If the net difference is positive, it’s added to a running sum, if the difference is negative, it’s subtracted.

American Depository Receipts (ADRs)

Receipts held by an American bank that represents shares in a foreign company.

Ask

Also called the “offer,” “offer price,” or “asking price” the ask is the lowest price a seller is willing to accept for a share of stock.

Bid

The highest price that someone is willing to pay for a share of stock.

Big Board

Another term for the New York Stock Exchange (NYSE)

Blue Chip Stocks

Stocks of companies known for their long-term record of earning profits and paying dividends.

Bollinger Bands

Lines on a stock’s chart above and below the price action that indicate the amount of volatility of the security. Narrow bands indicate low volatility, wide bands indicate high volatility.

Breakout

The point at which the market price for a security moves out of a trading range or chart pattern.

Call Option

The right but not the obligation to buy a stock, bond, commodity, or other instrument at a specified price within a specified period of time.

Closing Price

The last trading price of a stock before the market closes for the day.

Congestion area

A period of time over which there is little price progress.

Consolidation

A pause in a stock, bond, commodity or other instrument, which sets the stage for the next price move.

Consumer Price Index (CPI)

A monthly report produced by the Labor Department that measures inflationary pressures for certain goods and services purchased in urban areas.

Correction

A temporary downward movement in the price of a stock, bond, commodity, index or the stock market following a rise in the market.

Cyclical Stocks

Shares that are sensitive to the economic and business cycle and that tend to rise during an upturn in the economy and fall during a downturn.

Day Order

An order to buy or sell a stock that will be cancelled if the order is not filled by the end of the day.

Day Trading

The practice of executing short-term trades usually within a single trading day.

Defensive Stocks

Those stocks that do not tend to decline as much as the general market when stock prices are falling. These include consumer staples, utility and drug companies that typically pay high dividends.

Delayed Opening

The postponement in the trading of an issue beyond the normal opening usually because of an imbalance of buy and sell orders or pending corporate news.

Discount Rate

The interest rate charged by the Federal Reserve on short-term loans to banks and financial institutions. This rate affects the rates these financial institutions charge their customers.

Doji

A single candlestick formed by a stock when the open and close are nearly identical.

Dow Jones Industrial Average

An index that tracks the price changes of 30 significant industrial stocks traded on the New York Stock Exchange. Their combined market value is equal to roughly 20 percent of the market value of all stocks listed on the NYSE.

Dow Jones Transportation Average

An index that monitors the price changes of the stocks of 20 airline, railroad, and trucking companies.

The Dow Jones Utility Average

An index that measures the performance of 15 gas, electric and power companies.

Dow Jones 65 Composite Average

An index that monitors the averages of the Dow industrial, transportation, and utility averages indicated above.

Earnings

The income a company receives after all other costs, taxes and expenses have been paid. Also called profit or net income.

Economic Indicators

Key statistics used to analyze business conditions and to make forecasts.

Electronic Communications Network (ECN)

Order matching systems that execute trades without a middleman, such as a specialist or market maker, and allow traders to advertise a price better than the current bid or offer. Some ECNs include ARCA (Archipelago), BTRG (Bloomberg), INCA (Instinet), ISLD (Island), SelectNet (NASD), and REDI (Spear Leads).

Emerging markets

Financial markets in nations that are developing market-based economies and that are enjoying increasing popularity with U.S. investors.

Fair Value

A mathematical relationship between the S&P 500 index cash and futures market.

Fed Funds Rate

The interest rate banks charge on overnight loans to other banks that need more cash to meet their reserve requirements.

Federal Open Market Committee (FOMC)

The policy-making arm of the Federal Reserve that sets monetary policy to meet the Fed’s objectives of regulating the money supply and credit markets. The FOMC uses the purchase and sale of government securities, which increases or decreases the money supply, and it also sets key interest rates like the discount and Fed funds rates.

Flag

A sharp price spike followed by a sideways consolidation area that moves in a direction counter to the rally.

Float

The number of outstanding shares in corporation available for trading by the general public.

Hedging

An investment made in order to reduce the risk of adverse price movements in a security by taking an offsetting position in a related security, such as an option or short sale.

Index Fund

A passively managed mutual fund that seeks to mirror the performance of a specific index, like the S&P 500.

Initial Public Offering (IPO)

A company’s initial stock offering to the public.

Inside Trading

The legal trading of a security by company officers based on information available to the public. This stock term also applies to illegal trading of securities based upon information not made available to the public.

Instinet

A particular ECN that enables institutions to trade without a broker/dealer during nonmarket hours.

Leading Economic Indicators

An index of 11 economic measurements used to forecast likely changes in the economy. The components include average work, unemployment claims, orders for consumer goods, slower deliveries, plant and equipment orders, building permits, durable order backlog, material prices, stock prices, M2 money supply and consumer expectations.

Long-Term Equity Anticipation Securities (LEAPS)

Options that won’t expire for up to 3 years.

Level I

Often called “quick quote” is information that only shows the current bid, ask, last trade and volume, and some daily summary information.

Level II

Real time display of ECN bids and offers which allows a trader to identify the market maker with the lowest bid-ask spread and to gauge the potential for a stock, given the activities of the market makers.

Limit Order

An order to buy a stock at or below a specific price or sell it at or above a specific price.

Long Bond

A bond with a maturity of more than 15 years issued by the U.S. Treasury that is considered a key benchmark of trends in long-term interest rates.

Margin Call

A demand for money to satisfy the credit limits available to customers from brokers in accordance with Regulation T.

Market Capitalization

The total market value of a company that is calculated by multiplying the number of shares times the current market price for them.

Market Maker

A trader responsible for maintaining an orderly market in an individual stock by being ready to buy or sell shares. On a stock exchange, the market maker is known as a specialist.

Market Order

An order to buy or sell at the best available price.

Mid Cap Stocks

A term used to designate stocks in companies that have a market capitalization of between $1 billion and $5 billion.

Moving Average

A mathematical average of prices or volume levels for a stock over a given number of periods (usually over 10, 20, 50, 100 or 200-day periods). The relatively smooth line that results from plotting these values on a chart allows technical analysts to spot trends. It’s called a “moving” average, because after each period, a new period is added and an old one is dropped from the calculation.

NASDAQ

A computerized system established by the National Association of Securities Dealers (NASD) to facilitate trading by broker/dealers with current bid and ask quotes on over-the-counter stocks, and some listed stocks.

NASDQ Composite Index

A market-value weighted index, which takes into account not only the current share price, but the market capitalization, of all common stocks that are listed on the Nasdaq. The index is used primarily to track technology stocks.

National Associate of Securities Dealers (NASD)

A membership orgainization for securities-brokerage firms and underwriters in the U.S. that promise to abide by the association rules. It sets guidelines for ethincs and standardized insutry practices, and has a disciplinary structure for looking into allegations of violations. The NASD also operates the NASDAQ stock market.

New York Stock Exchange

An exchange founded in 1792 composed of some 23,000 companies.

Odd Lot

An order to buy or sell less than 100 shares of stock.

Offer

Same as the ask price.

Open Order

A buy or sell order that has not been executed or cancelled.

Options

An agreement that allows an investor to buy or sell a stock during a specific time for a specific price.

Over-The-Counter (OTC)

A market where transactions are conducted by a network of broker/dealers both over the phone and through a computer network rather than through a stock exchange. OTC stocks are stocks that are unable to meet the listing requirements for exchange-traded stocks.

Penny Stocks

Stocks that are priced less than $1 per share, and in some cases, less than $5 a share. Most penny stocks only have a few million in net tangible assets and have short operating histories.

Pink Sheets

The printed quotations of the bid and ask prices for over-the-counter stocks not included in the Nasdaq over-the-counter listings and published by the National Quotation Bureaus, Inc.

Point

A change of $1 in the market price of a stock.

Private Placement

The sale of stocks or other investments directly to an investor, which do not have to be registered with the Securities and Exchange Commission (SEC).

Producer Price Index (PPI)

A monthly report issued by the U.S. Bureau of Labor that is a gauge of inflation at the wholesale price level.

Program Trading

Computer-driven, automatically-executed stock trades that involve large-volume purchases or sales of a basket of 15 or more stocks. The buy or sell orders are usually triggered by an index reaching a certain level. Because of the volatility they can create, there are restrictions on times when program trades can be executed.

Put Option

An agreement that gives an investor the right but on the obligation to sell a stock, bond, commodity or other instrument at a specified price within a specified time.

Put/Call Volume Ratio

The volume of trading in the total number of puts divided by the total number of calls for a security or index over a specific period of time. High put/call ratios often signal a market turnaround.

Round Lot

A unit of trading of 100 shares of a stock

Quadruple Witching

A slang term for the quarterly expiration of stock index futures, stock index options, stock options and single stock futures (SSF) all expire.

Russell 2000

A stock index that consists of the 2000 smallest companies in terms of market capitalization in the Russell 3000 Index, published by the Frank Russell Company.

Secondary Offering

A registered offering of a large block of a security by a current shareholder. The shares offered are part of the shares initially issued to the public, and the proceeds of the sale go to the holder of the security, not to the company. A secondary offering does not change the number of outstanding shares.

Sector

A category of stocks within certain industries, like energy, machinery, business services, metals/steel, transport, semiconductors, retail, etc.

Securities and Exchange Commission (SEC)

The federal agency that was created in 1934 to enforce securities laws and set standards for disclosure for publicly traded companies and mutual funds.

Settlement Date

The date when a stock transaction must be paid for, which normally occurs 3 days after the trade date.

Short Covering

The purchase of a stock that closes out a short stock position.

Short Interest

The total number of shares of a particular security that have been shorted and not yet repurchased.

Short Sale or Selling Short

A strategy used by investors whose aim is to profit from the falling price of a stock by borrowing a security from a broker and selling it, with the understanding that it must be bought back, hopefully at a lower price.

Small Cap Stocks

A term used to designate stocks in companies that have a market capitalization of between $250 million and $1 billion.

Stock Split

An increase in the number of outstanding shares of a given stock which keeps the proportional amount of equity for each investor the same.

Stop Limit Order

An order to buy or sell a certain number of shares of stock at a specified price or better, but only after a specified price has been reached.

Stop Order

An market order to buy or sell a security once a certain price is reached or passed.

Swing Trading

A trade that is made with the intention of profiting from the natural ebb and flow of a stock’s movements over short periods of times, generally 2 to 5 or more days. .

Technical Analysis

A form of stock evaluation that relies on stock data such as volume and price trends, often using charts, to make predictions on future stock movements.

Trade Date

The actual date on which your shares are purchased or sold. This date is used to determine eligibility for dividends.

Triple Witching

A slang term for the quarterly expiration of stock index futures, stock index options and options on individual stocks.

VIX

A market volatility index based upon the implied volatilities of the S&P Index calls and puts options, and measures the degree of market risk/investor fear. High values reflect investor fear, pessimism and high volatility, while low values reflect optimism and low volatility. High VIX values often indicate the potential for a market turnaround.