Investment Glossary

Amex - American Stock Exchange. Exchange largely specializing in smaller, more speculative securities.

Ask - The minimum price specified by the seller of a security.

Auction Market - A location where securities are exchanged, generally with a specialist acting as auctioneer matching buyers with sellers.

Back-Test - A means of determining the potential effectiveness of a given strategy by applying the defined rules on historical data.

Bear Market - A period of at least several months during which market prices are declining.

Bid - The maximum price specified by the buyer of a security.

Bid/Ask Spread - The difference between the inside (highest) bid and inside (lowest) ask price.

Breakout - A sudden rise beyond a trendline or trading range.

Bull Market - A period of at least several months during which market prices are rising.

Correction - A period of declining prices typically in a market the analyst considers to have been overpriced. The term is applied to declines of a lesser magnitude than bear markets.

Curve Fitting - Adjusting parameters or otherwise altering a strategy so as to create good apparent results on a dataset. Strategies which have been subject to curve fitting seldom produce good results during real-time application.

Day Trade - Securities trading in which positions are opened and closed in the same day or trading session.

Divergence - Any discrepancy between two related prices or indicators. For example, a technician may notice that although the price of a stock has continued upward the RSI of that stock has turned downward.

Downtick - A decline of a security's price relative to the previous trade.

Drawdown - The difference between the high and low of an equity curve over a span of time. If a strategy had gained $4000 at one time but sustained $2000 in losses subsequently before regaining profitability, the drawdown would be $2000.

Entry Price - The market value of the security at the time the position is taken.

Fundamental Analysis - The study of factors intrinsic to the underlying firm or entity which is issuing the security. Balance sheets, valuation ratios and economic reports are items of interest to those performing this kind of analysis.

Gap - A discontinuity in a price chart between the closing price and the subsequent opening price. Generally, lower volume and higher volatility will tend to increase the incidence of gaps.

Investing - The purchase of securities or other assets with the goal of increasing the value of the principal generally over a period of years. Investors typically hold their assets for a longer period of time than do speculators or traders.

Level 1 Data - A display of the highest bid and lowest ask price among the securities offered by the broker. Often referred to as the "inside" price.

Level 2 Data - A display of all the outstanding orders received by the exchange for execution. This generally appears as a grid with bids on the left and offers on the right. Considered by some to be misleading and prone to manipulation.

Limit Order - A specification to buy or sell a security at or better than a given price. For example, a limit sell order of $65 gives the exchange permission to sell the stock for any price at or greater than $65.

Lot - 100 shares.

Margin - Money available to brokerage clients beyond the underlying value of the cash and securities. For stock brokerage accounts this is capped at 50% of the asset value of the account.

Margin Call - A demand by the brokerage for the account holder to provide more collateral usually as a result of a decline in the value of held securities.

Market Order - An order to buy or sell a security at the prevailing price, generally at or near the price fixed by the opposite party in the transaction. For example, a market order to sell a security will generally be filled at or near the bid price. Market orders are generally used where: a)liquidity is high enough that bid/ask spreads are minimal and/or b)The loss incurred due to the relatively poor fill is outweighed by other factors such as timing.

Market Maker - A market participant who sets prices by balancing buy and sell orders.

Moving Average - An average of prices over a given number of bars. A three day moving average on a daily chart would be the average of today's price, yesterday's price and the day-before-yesterday's price.

Nasdaq - National Association of Securities Dealers Automated Quotation System.

NYSE - New York Stock Exchange.

Odd Lot - A quantity of stock less than 100 (and greater than zero). For example, an order to buy 25 shares would be an odd lot purchase.

Offer - The price at which a seller is willing to part with a security. Also called "Ask".

Optimization - The process of modifying a strategy, generally by altering parameters, so as to improve performance on past data. Optimization can lead to misleading results due to the phenomenon of "Curve Fitting" (See)

OTC - Over The Counter. A security which is traded by some means other than on a physical exchange such as the NYSE or Amex. Although Nasdaq stocks are traded via an electronic dealer network and the system falls under the rubric of this definition, it is usually considered an exchange. Typically OTC refers to the Over the Counter Bulletin Board (OTCBB).

Overbought - A condition which arises after a security has sustained a relatively prolonged rise in price and is purportedly ready for a reversal or stalling of the uptrend. Whether a given issue is in fact overbought is open to much interpretation depending on the methods and timeframe under consideration.
Oversold - A condition which arises after a security has sustained a relatively prolonged decline in price and is allegedly ready for a reversal or stalling of the downtrend. (See "Overbought"

Overtrading - Trading with excessive frequency so that performance suffers. Poor performance is a result of: a)Excessive commissions and slippage and/or b)Ill conceived trades being taken.

Position Trader - An individual who holds positions for at least a week and often several months. A position trader has a longer term viewpoint than a Swing Trader but shorter than an Investor.

Profit Taking - The sale of securities generally after a notable rise in price. When used by an observer of market action it is usually used to explain why a trend has stalled or reversed. For example, an analyst might say "XYZ stock pulled back slightly today because of profit taking by speculators."

Quote - The display of a security price.

Rally - An uptrend occurring in the context of a broader downtrend.

Resistance - A zone above the current price where prices have stalled or reversed in the past.

Reversal - A change in trend.

Round Turn - A completed buy/sell or short-sell/cover cycle. Commissions are often quoted at the Round Turn price, giving the cost of getting into and out of the trade.

Scalping - The shortest term trading possible with hold times measured in seconds.

SEC - Securities and Exchange Commission.

Securities - Stocks or equities.

Share - A fraction of ownership in a particular company. The fraction of ownership represented by each share is the reciprocal of the number of shares outstanding. For example, if a company had 10,000 shares outstanding, each share would represent one 10,000th of the firm.

Short - Having a debit position on a security with a credit cash offset.

Short Selling - The process of selling a security which is unowned by the account holder in the hopes it will fall in price and can be replaced, or covered, at a lower price. (See Short)

Short Squeeze - A condition in which short position holders are forced to cover their shares in a market where such shares are not readily available.

Short-Term - Though this is highly dependent on one's overall investment orientation, we generally consider the short term horizon to span two to ten days.

Slippage - The amount lost in trading due to discrepancies between theoretical (ideal) prices and actual fill prices. Slippage will be greatest in illiquid markets and in conditions where prices are moving rapidly.

SOES - Small Order Execution System.

Specialist - A market maker for a given stock. Specialists retain a reserve of the stock which they trade from as needed to ensure liquidity.

Spread - A differential between two related but distinct entities.

Stock Split - The simultaneous decrease in stock price and issuance of shares in inverse proportion to that price change. For example, a 2-for-1 split on MSFT would mean that each owner of Microsoft shares would double the shares in his/her account, but each share would be worth half as much.

Stop Order - An order which becomes executable at a specified price. For example a Stop Sell Order placed at $35.45 would be executed once the bid price reached $35.45. Though stop market orders are generally used to exit a trade, entry may be made by use of a stop limit order which specifies not only at what point it will become executable but also the maximum (or minimum) price at which the trader is willing to perform the transaction.

Support - A zone underneath the current price in which prices have stalled or deflected in the past. Often a price level which caused the security to to turn upward in the past will do so again.

Technical Analysis - The use of price action - especially as revealed on a chart - as a means of making decisions to buy and sell. Often indicators like moving averages and stochastic oscillators are calculated and plotted with price as a guide.

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