Glossary

Learn & be a stock guru...

The financial world has developed a special investment-oriented language to help describe the stock market, investments, securities for the stock market, stock market analysis, and its conditions. At times you may be confronted with a term which is totally alien or has a completely different meaning from what you thought. Misunderstanding these terms can sometimes lead to the wrong conclusion, and that can cost you money!

What you don't know can hurt you.

Balance Sheet

A firm's balance sheet is a snapshot of its financial picture on a given day. One side of the balance sheet totals up assets, moving from most liquid (cash) to least liquid (plant and equipment or goodwill). The other side of the balance sheet lists liabilities in order of immediacy. Remember that assets must equal liabilities plus shareholders equity. The balance sheet, along with the income statement, is an important tool for analyzing the financial health of a company. Using only a firm's balance sheet, you can compare current assets and current liabilities to assess liquidity; you can compare debt to shareholder's equity to see how leveraged the company is; and you can get a better idea of whether the assets might include some hidden value.

Balanced Fund

A mutual fund that invests in some mix of stocks and bonds. A good balanced fund offers the advantage of one-stop shopping; it handles asset allocation and mixes equities with fixed income securities. The knock on these is that you don't get to determine your own asset allocation, and there is considerable evidence that asset allocation is the most important factor in portfolio returns. Instead of a balanced fund, for instance, you could choose a good equity fund and a good bond fund and then decide your own proportions.

Bankruptcy

Under federal law, a debtor hands over his assets to the bankruptcy court and is relieved of the future obligation to repay his unsecured debts.

Bar Charts

A chart that displays a security's open, high, low, and close prices using one vertical line for each time period - whether it is a day, week, month, etc. Bar charts are the most popular type of security chart. On the left side of the bar is a ""tick"" that indicates the opening price. The tick that appears on the right side of the bar is the closing price. The vertical length of the bar shows the price range.

Basis Point

One one-hundredth of a percent. Thus, if a bond's yield drops from 6.56 percent to 6.51 percent, it is said to have fallen by 5 basis points.

Bear

A Wall Street biped who believes the market will go down. In recent years bulls have rendered bears almost extinct, but it's hard to believe that the Ursidae family will not come roaring back sooner or later.

Bear Market

When stocks trend downward for a long period, it's a ""bear"" market. Conversely, when stock prices have risen steadily over several months, experts call it a ""bull"" market. These terms were selected based on the way the two animals attack. When a bull rushes forward, he holds his head low and then gores upward with his horns. A bear, on the other hand, strikes downward with his paws.

Bear Trap

A signal that suggests that the rising trend of an index or stock has reversed but then proves to be false.

Bearish Spread

An option spread designed to be profitable if the underlying security declines in price. A bearish debit spread involves purchasing a put and selling a further out-of-the money put. A bearish credit spread involves selling a call and buying a further out-of-the money call.

Beneficiary

A person who receives a benefit, such as the income of a trust or proceeds from an insurance policy.

Bid

The price at which someone is willing to buy a security. This is what you get when you sell (as opposed to the asked price, which is what you hoped to get). In over-the-counter trading, securities dealers profit from the spread between bid and asked prices.

Bid Size

The number of shares the buyer(s) offering the bid price are willing to buy.

Bid/Tick

ndicates whether the current bid is higher, lower, or the same as the previous bid.

Blue Chip

Generally refers to stocks of large, established companies that are considered less risky than most

Bollinger Bands

A trading band (upper and lower boundary lines) plotted at standard deviation levels above and below a moving average. Because standard deviation measures volatility, the bands widen during volatile markets and contract during calmer periods.

The major assumption that technical analysts make when using Bollinger Bands to trade is that prices tend to stay within the upper and lower band. When a price breaks through a boundary, either above the upper line or below the lower line, it usually signals that the move is strong enough to continue further. When the bands get closer together, it is more likely that there will be a price breakout. You can create the bands using any moving average. Some analysts recommend the 10-day moving average (MA) for short-term trading, the 20-day MA for intermediate trading, and the 50-day MA for long-term trading.

When using Bollinger Bands to arrive at buy and sell decisions, it is recommended you confirm potential trades with other indicators and fundamental data.

Bond

Basically, a bond is an IOU from a company, governmental entity or other issuer promising to repay a given amount by a given date. Usually, interest is paid. Bonds represent debt, as opposed to stocks, which represent an ownership stake. Bonds usually can be bought and sold, just as stocks can be, and their prices fluctuate based on interest rates and the creditworthiness of the issuer, among other factors.

Bond Rating

A grade on creditworthiness given to a bond by one of the big rating agencies, such as Moody's or Standard & Poor's. The top ratings, some variant of A or AAA, signify the greatest likelihood that bondholders will be paid interest and get return of principal, but bonds with these ratings usually pay the least interest. Risk and reward are related, after all.

Book Value

This is the net worth of a company, the amount by which assets exceed liabilities. It's also known as ""shareholder's equity."" Most companies are worth far more than their book value, since ""worth"" means what someone is willing to pay, and hardly any good companies can be acquired for this baseline price. Book value is of particular interest to value investors.

Book Value/Share

This is simply the company's most recent quarter net worth divided by the latest shares outstanding. Often of interest to value investors, the book value per share ratio is an expression of how much in actual value would be left for each share if the company went out of business. This figure can be especially noteworthy when considering a turnaround situation. Sometimes a firm's stock is so beaten down that shares are trading at or below book value, implying a real bargain (or that its balance sheet overstates its assets). In such circumstances, a look at cash and marketable securities per share can help. Book value per share is not to be confused with "break-up value," which attempts to determine what the parts of a company might be worth if sold off. This figure is much harder to pinpoint but is considered by many analysts more realistic. It is also usually higher than book value.

Breakout

If a stock has traded in a narrow range for some time (in other words, built a base) and then advances above the resistance level, this is said to be an upside breakout. Breakouts are suspect if they do not occur on high volume (compared to average daily volume). Some traders use a buy stop, which calls for purchase when a stock rises above a certain price.

The opposite of upside breakout is called penetration of support or breakdown. In the same way that a trader can set a buy stop to enter a position on an upside breakout, a trader can set a sell stop to exit a position on breakdown.

Brokerage Availability

Lists brokerage firms that make the fund available through their mutual fund program. If ""NTF"" (No Transaction Fee) appears after the broker name, it means that in most cases the broker does not charge a commission for funds participating in their program.

Bucket shops

Hard-sell telemarketing operations pushing securities or financial services.

Bull

A species common on Wall Street of late, bulls believe the market will go up

Bull Market

When stock prices have risen steadily over several months, experts call it a ""bull"" market. When stocks trend downward for a long period, it's a ""bear"" market. These terms were selected based on the way the two animals attack. When a bull rushes forward, he holds his head low and then gores upward with his horns. A bear, on the other hand, strikes downward with his paws.

Bull Trap

A signal that suggests that the declining trend of an index or stock has reversed but then proves to be false.

Bull/Bear Ratio

A market sentiment indicator based on a weekly poll of investment advisors as to whether they are bullish, bearish, or neutral on the stock market. Extreme optimism on the part of the public and even professionals almost always coincides with market tops. Extreme pessimism almost always coincides with market bottoms. Historically, readings above 60 percent have indicated extreme optimism (which is bearish for the market) and readings below 40 percent have indicated extreme pessimism (which is bullish for the markets).

Bullish Spread

An option spread designed to be profitable if the underlying security rises in price. A bullish debit spread involves purchasing a call and selling a further out-of-the money call. A bullish credit spread involves selling a put and buying a further out-of-the money put.

Buy on Margin

The practice of buying stock with money borrowed from a broker. The loan is collateralized by the security you've purchased, which is held in a margin account. The broker will charge you interest, but the rate is usually attractive compared with other forms of debt, since it is secured by an easily marketable stock. Still, you need to make enough on the stock to pay commissions and cover interest. Trading on margin can improve investment returns, but it's risky. If you buy a stock on margin and it goes down, you'll need to pony up more cash to maintain your collateral, or watch your broker sell out your position.