After-Hours Trading
Trading Concepts
Stock trading that occurs outside regular market hours (before 9:30 AM or after 4:00 PM ET), allowing investors to react to news and events when primary exchanges are closed. This extended trading involves lower liquidity and wider bid-ask spreads due to fewer market participants.
Example: An investor sells shares at 5:00 PM after a company releases disappointing earnings at market close, avoiding waiting until the next trading day when prices might gap down further.
Alpha
Performance
The excess return of an investment relative to the return of a benchmark index. Positive alpha indicates outperformance, while negative alpha shows underperformance.
Example: If a fund returns 12% while its benchmark returns 10%, the alpha is +2%, indicating the manager added value beyond market returns.
Arbitrage
Trading Strategy
The simultaneous buying and selling of an asset in different markets to profit from price discrepancies, exploiting temporary market inefficiencies. This strategy helps markets reach equilibrium by eliminating price differences across venues.
Example: A trader notices a stock priced at $50 on the London Stock Exchange and $51 on the NYSE, so they buy in London and immediately sell in New York, pocketing a $1 profit per share.
Asset Allocation
Portfolio Strategy
The process of dividing investments among different asset categories like stocks, bonds, cash, and real estate to balance risk and reward according to goals, risk tolerance, and time horizon.
Example: A conservative investor might allocate 40% stocks, 50% bonds, 10% cash, while an aggressive investor might use 80% stocks, 15% bonds, 5% cash.
Ask Price
Trading
The lowest price a seller is willing to accept for a security. Together with the bid price, it creates the spread that represents market liquidity.
Example: If a stock's bid is $49.95 and ask is $50.05, you'll pay $50.05 to buy shares immediately. The $0.10 difference is the bid-ask spread.
Bear Market
Market Condition
A market condition in which prices fall 20% or more from recent highs, typically accompanied by widespread pessimism and negative investor sentiment.
Example: The 2008 financial crisis saw the S&P 500 decline over 50% from its 2007 peak, representing a severe bear market lasting multiple years.
Beta
Risk Metric
A measure of a stock's volatility relative to the overall market. Beta of 1.0 moves with the market, >1.0 is more volatile, <1.0 is less volatile.
Example: A stock with beta of 1.5 tends to rise 15% when the market rises 10%, and fall 15% when the market drops 10%.
Bid-Ask Spread
Trading Concepts
The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller will accept (ask) for a security. Narrower spreads indicate higher liquidity and lower transaction costs for investors.
Example: If a stock's bid price is $100 and ask price is $100.50, the spread is $0.50, which represents the market maker's potential profit margin and the cost to traders.
Bid Price
Trading
The highest price a buyer is willing to pay for a security at a given time. When you sell at market, you receive the current bid price.
Example: If the bid is $25.50 and you place a market sell order, you'll receive $25.50 per share (minus commissions).
Blue Chip Stock
Stock Type
Shares of large, well-established, financially sound companies with a history of reliable performance, often paying regular dividends. Named after the highest-value poker chips.
Example: Companies like Apple, Microsoft, Johnson & Johnson, and Coca-Cola are considered blue chips due to their size, stability, and track records.
Bollinger Bands
Technical Analysis
A technical analysis indicator consisting of a moving average with upper and lower bands set two standard deviations away, measuring price volatility and identifying overbought or oversold conditions. The bands expand during volatile markets and contract during calm periods.
Example: A trader notices a stock price touching the lower Bollinger Band at $45 after trending within the bands, suggesting the stock may be oversold and due for a bounce back toward the middle band.
Bull Market
Market Condition
A market condition characterized by rising prices, typically defined as a 20% or greater increase from recent lows, accompanied by investor optimism and confidence.
Example: From 2009-2020, the S&P 500 experienced one of the longest bull markets in history, rising over 400% from financial crisis lows.
Callable Bond
Fixed Income
A bond that gives the issuer the right, but not the obligation, to redeem the bond before its maturity date at a specified call price. Issuers typically call bonds when interest rates decline to refinance at lower rates.
Example: A company issues a 10-year callable bond at 6% interest but can call it after 3 years; if rates drop to 4%, the company may call the bond early, pay bondholders the call price, and issue new bonds at the lower rate.
Call Option
Options
A contract giving the buyer the right, but not the obligation, to purchase an underlying asset at a specified strike price before or on the expiration date. The buyer pays a premium for this right, while the seller receives the premium and must deliver the asset if exercised.
Example: You buy a call option on XYZ stock with a $50 strike price for a $3 premium; if XYZ rises to $60, you can exercise the option to buy at $50 and profit $7 per share ($10 gain minus $3 premium).
Capital Gain
Returns
The profit realized when you sell an investment for more than you paid. Short-term gains (held <1 year) are taxed as income; long-term gains (>1 year) receive preferential tax treatment.
Example: Buy stock at $50, sell at $75 = $25 capital gain per share. If held over a year, taxed at 0%, 15%, or 20% based on income level.
CAGR (Compound Annual Growth Rate)
Performance
The rate of return required for an investment to grow from its beginning balance to ending balance, assuming profits are reinvested annually.
Example: Investment grows from $10,000 to $16,105 in 5 years. CAGR = 10%, meaning it grew at an average of 10% per year compounded.
Compound Interest
Growth Concept
Interest calculated on the initial principal and accumulated interest from previous periods. Often called "interest on interest," it accelerates wealth growth over time.
Example: $10,000 at 8% for 30 years: Simple interest = $34,000, Compound interest = $100,627. The $66,627 difference demonstrates compounding power.
Correction
Market Condition
A decline of 10-20% from recent highs. Corrections are normal, healthy market events that occur regularly, helping to cool off excessive valuations.
Example: In 2018, the S&P 500 fell approximately 19% from September to December, representing a correction that ended just before reaching bear market territory.
Circuit Breaker
Market Regulation
Regulatory mechanisms that temporarily halt trading across the entire market when the S&P 500 declines 7%, 13%, or 20% in a single day, designed to prevent panic selling and allow investors time to digest information. Level 3 (20% decline) closes markets for the remainder of the day.
Example: On March 9, 2020, during the COVID-19 pandemic, the S&P 500 dropped 7% shortly after market open, triggering a 15-minute trading halt across all exchanges.
Convexity
Fixed Income
A measure of the curvature in the relationship between bond prices and interest rates, representing how a bond's duration changes as yields change. It accounts for the non-linear price sensitivity of bonds that duration alone cannot capture.
Example: Two bonds with the same duration but different convexities will react differently to large interest rate changes; a bond with higher convexity will gain more when rates fall and lose less when rates rise.
Correlation
Portfolio Management
A statistical measure (ranging from -1 to +1) that describes how two assets move in relation to each other. Perfect positive correlation (+1) means assets move together, perfect negative correlation (-1) means they move in opposite directions, and zero correlation means no relationship.
Example: U.S. stocks and U.S. bonds typically have a correlation of +0.1 to +0.3, meaning they often move independently. During market crashes, bonds may rise while stocks fall (negative correlation), providing downside protection.
Coupon Rate
Fixed Income
The annual interest rate established when a bond is issued, expressed as a percentage of the bond's face value. This rate determines the periodic interest payments the bondholder receives and remains fixed throughout the bond's life.
Example: A $10,000 bond with a 4% coupon rate pays $400 annually ($200 semi-annually) regardless of the bond's current market price.
Covered Call
Options Strategy
An income-generating strategy where an investor who owns shares of stock sells call options on those same shares, collecting premium income in exchange for potentially limiting upside gains if the stock rises above the strike price.
Example: You own 100 shares of DEF at $50 and sell a call option with a $55 strike for $2; if DEF stays below $55, you keep the shares and $200 premium; if it rises above $55, your shares may be called away but you've earned $5 capital gain plus $2 premium.
Discounted Cash Flow (DCF)
Valuation
A valuation method that estimates the intrinsic value of an investment by projecting future cash flows and discounting them back to present value using a discount rate. DCF analysis helps investors determine what an asset should be worth today based on expected future earnings.
Example: An investor analyzing a tech company projects it will generate $10 million in cash flows annually for 10 years. Using a 10% discount rate, the DCF calculation determines the company's intrinsic value is $61.4 million. If the market price is $50 million, the stock may be undervalued.
Dividend
Income
A portion of company profits distributed to shareholders, typically paid quarterly in cash. Represents a return on investment separate from capital gains.
Example: Company pays $1 per share quarterly dividend. Own 100 shares = receive $100 quarterly, or $400 annually in passive income.
Dividend Aristocrat
Stock Classification
S&P 500 companies that have increased their dividend payouts for 25 consecutive years or more, demonstrating financial strength and shareholder commitment.
Example: Coca-Cola, Procter & Gamble, and Johnson & Johnson have each increased dividends for 60+ years, earning Dividend King status (50+ years).
Dividend Yield
Metric
Annual dividends per share divided by stock price, expressed as a percentage. Indicates how much income you receive relative to your investment.
Example: Stock trading at $50 pays $2 annual dividend = 4% yield ($2 / $50 Ă— 100%). Higher yields aren't always better if dividend is unsustainable.
Diversification
Risk Management
Spreading investments across various securities, sectors, and asset classes to reduce risk. Based on the principle "don't put all eggs in one basket."
Example: Portfolio holding 30 stocks across 10 sectors plus bonds is more diversified than 5 tech stocks, reducing impact of any single position's decline.
DRIP (Dividend Reinvestment Plan)
Strategy
Automatically reinvests dividends to purchase additional shares, accelerating compound growth. Most brokers offer free DRIPs with fractional share purchases.
Example: Receive $200 dividend, DRIP buys $200 more stock. Those shares generate more dividends next quarter, creating snowball effect over decades.
Dollar-Cost Averaging (DCA)
Investment Strategy
An investment strategy of investing fixed dollar amounts at regular intervals regardless of market conditions, which results in purchasing more shares when prices are low and fewer when prices are high. DCA reduces the impact of market timing and volatility on investment returns.
Example: An investor commits to investing $500 monthly in an index fund. In January, shares cost $50 (buying 10 shares); in February, they drop to $40 (buying 12.5 shares); in March, they rise to $55 (buying 9.1 shares). The average cost per share is lower than the simple average of prices.
Duration
Fixed Income
A measure of a bond's sensitivity to interest rate changes, expressed in years, that estimates how much a bond's price will change for a 1% change in interest rates. The higher the duration, the more sensitive the bond is to rate fluctuations.
Example: A bond with a duration of 5 years will decrease approximately 5% in value if interest rates rise by 1%, and increase 5% if rates fall by 1%.
EBITDA
Financial Metric
Earnings Before Interest, Taxes, Depreciation, and Amortization—a measure of a company's operating profitability that excludes non-operating expenses and non-cash charges, allowing for cleaner comparison of operational performance across companies with different capital structures.
Example: A manufacturing company reports $50 million in revenue, $30 million in operating expenses, $5 million in depreciation, and $2 million in interest. Its EBITDA is $20 million ($50M - $30M), providing a clear view of operational profitability before financing and accounting decisions.
Earnings Per Share (EPS)
Metric
Company's net profit divided by number of outstanding shares. Key metric for evaluating profitability on a per-share basis.
Example: Company earns $100 million with 20 million shares = $5 EPS. Used to calculate P/E ratio and assess value relative to stock price.
ETF (Exchange-Traded Fund)
Investment Vehicle
A basket of securities that trades like a stock on an exchange. Offers diversification, low costs, and transparency. Can track indices, sectors, or commodities.
Example: SPY (SPDR S&P 500 ETF) holds all 500 stocks in the S&P 500, providing instant diversification in a single purchase with expense ratio around 0.09%.
Efficient Frontier
Portfolio Theory
A graphical representation of optimal investment portfolios that offer the highest expected return for each level of risk. Portfolios on the efficient frontier are considered ideal because no other portfolio can provide better returns without taking on additional risk, or lower risk without sacrificing returns.
Example: An investor plots various portfolio combinations of stocks and bonds. The efficient frontier curve shows that a 70/30 stock/bond portfolio offers 8% expected return with 12% risk, while a 50/50 portfolio offers 6.5% return with 8% risk. Portfolios below this curve are suboptimal.
EV/EBITDA
Valuation Metric
Enterprise Value to EBITDA—a valuation multiple that compares a company's total enterprise value (market cap plus debt minus cash) to its EBITDA, providing a capital structure-neutral way to value companies. Lower ratios may indicate undervaluation, though appropriate levels vary by industry.
Example: An investor compares two retail companies. Company X has an EV of $500 million and EBITDA of $50 million (EV/EBITDA of 10x), while Company Y has an EV of $800 million and EBITDA of $100 million (8x). Company Y may be relatively undervalued.
Ex-Dividend Date
Trading
The date on which a stock begins trading without its declared dividend. Must own stock before this date to receive the upcoming dividend payment.
Example: Stock goes ex-dividend March 15th. Buy March 14th = receive dividend. Buy March 15th or later = miss this dividend payment.
Fibonacci Retracement
Technical Analysis
A technical analysis tool that uses horizontal lines to indicate potential support and resistance levels based on Fibonacci ratios (23.6%, 38.2%, 50%, 61.8%, 78.6%), helping traders identify where price reversals may occur during pullbacks.
Example: After a stock rallies from $50 to $100, a trader plots Fibonacci levels and places a buy order at the 61.8% retracement level ($69), anticipating support before the uptrend resumes.
Fill-or-Kill (FOK) Order
Order Type
A time-in-force order that must be executed immediately and completely at the specified price or better, otherwise the entire order is automatically canceled with no partial fills allowed. This order type is used by traders who need full execution to avoid slippage on large positions.
Example: A trader places a FOK order to buy 10,000 shares at $50, but only 8,000 shares are available at that price, so the entire order is canceled rather than partially filled.
FINRA
Regulatory
Financial Industry Regulatory Authority—a self-regulatory organization authorized by Congress to protect investors by ensuring broker-dealers and registered representatives operate fairly and honestly. FINRA writes and enforces rules governing securities firms, examines firms for compliance, and provides investor education.
Example: Before hiring a financial advisor, an investor uses FINRA's BrokerCheck tool to verify the advisor's credentials and check for any disciplinary history. She discovers her prospective advisor has three customer complaints and decides to interview other advisors instead.
Forward Contract
Derivatives
A customized, over-the-counter agreement between two parties to buy or sell an asset at a specified future date for a price agreed upon today. Unlike futures, forwards are not standardized or exchange-traded, creating counterparty risk but allowing flexible terms.
Example: A U.S. company agreeing to pay euros in six months enters a forward contract to buy €1 million at $1.10 per euro, locking in the exchange rate regardless of future market movements, protecting against currency fluctuation.
Free Cash Flow (FCF)
Financial Metric
Cash a company generates after accounting for capital expenditures needed to maintain or expand its asset base. Represents cash available to shareholders.
Example: Company generates $500M operating cash flow, spends $200M on capital expenditures = $300M free cash flow available for dividends, buybacks, or debt reduction.
Fundamental Analysis
Valuation Method
Evaluating securities by analyzing financial statements, management, competitive advantages, industry conditions, and economic factors to determine intrinsic value.
Example: Analyzing Apple by examining iPhone sales trends, profit margins, cash position, P/E ratio vs. peers, and growth prospects to estimate fair value.
Futures Contract
Derivatives
A standardized, exchange-traded agreement to buy or sell an asset at a predetermined price on a specified future date. Unlike forwards, futures are marked-to-market daily, require margin deposits, and are guaranteed by a clearinghouse, reducing counterparty risk.
Example: A wheat farmer sells December wheat futures at $7 per bushel to lock in revenue; at harvest, regardless of the spot price, the farmer is guaranteed $7, protecting against price declines (but giving up gains if prices rise).
Good-Til-Canceled (GTC) Order
Order Type
A limit order that remains active until it is either fully executed or manually canceled by the trader, typically expiring after 30-180 days depending on the broker. This allows investors to set target prices without daily order entry.
Example: An investor places a GTC buy order for a stock at $60 while it trades at $75, and the order executes three weeks later when the price drops to the target level.
Growth Stock
Stock Type
Shares of companies expected to grow earnings faster than the market average, typically reinvesting profits rather than paying dividends. Often trade at high P/E ratios.
Example: Amazon and Tesla are classic growth stocks—high valuations justified by rapid revenue growth and market expansion expectations rather than current profitability metrics.
Head and Shoulders Pattern
Technical Analysis
A bearish technical chart pattern that signals a trend reversal from uptrend to downtrend, consisting of three peaks with the middle peak (head) higher than the two outer peaks (shoulders). The pattern completes when price breaks below the neckline connecting the two troughs.
Example: A stock forms peaks at $80 (left shoulder), $95 (head), and $82 (right shoulder) with a neckline at $70; when price breaks below $70, traders anticipate further decline and enter short positions.
Hedge
Risk Management
A risk management strategy using financial instruments (often derivatives) to offset potential losses in an investment by taking an opposite position in a related asset. Hedging reduces exposure to adverse price movements but may also limit potential gains.
Example: An airline hedges against rising fuel costs by purchasing oil futures; if oil prices increase, gains on the futures offset higher operational costs, stabilizing the company's expenses.
Hedge Ratio
Risk Management
The proportion of an investment position that is protected through hedging instruments (such as options, futures, or inverse positions), expressed as a percentage from 0% (unhedged) to 100% (fully hedged). The hedge ratio helps investors quantify and manage their risk exposure.
Example: An investor holds $100,000 in technology stocks but fears a short-term correction. She purchases put options covering $40,000 of the position, creating a hedge ratio of 40%. If tech stocks fall 20%, the unhedged $60,000 loses $12,000, but the hedged portion is protected by the puts.
High-Yield Bond (Junk Bond)
Fixed Income
A bond with a credit rating below investment grade (BB or lower) that offers higher interest rates to compensate investors for increased default risk. These bonds are issued by companies with weaker financial profiles or heavy debt loads.
Example: A startup technology company issues bonds rated BB with a 9% yield, compared to AAA-rated corporate bonds yielding 4%, attracting investors willing to accept higher risk for potentially higher returns.
Immediate-or-Cancel (IOC) Order
Order Type
A time-in-force order that attempts to execute as much as possible immediately at the specified limit price, with any unfilled portion automatically canceled. This prevents large orders from being executed at prices far from the ideal level.
Example: A trader places an IOC order to sell 5,000 shares at $50; if only 3,000 shares can be sold immediately at that price, those execute while the remaining 2,000 shares are canceled.
Index Fund
Investment Vehicle
A mutual fund or ETF designed to track a specific market index like the S&P 500. Offers broad diversification, low fees, and tax efficiency.
Example: Vanguard S&P 500 Index Fund (VFINX) owns all 500 stocks in the S&P 500 with expense ratio of 0.04%, providing instant diversification across large-cap U.S. stocks.
Intrinsic Value
Valuation
The theoretical "true value" of a stock based on fundamental analysis of the company's finances, prospects, and assets, independent of current market price.
Example: Stock trading at $60 but DCF analysis estimates intrinsic value of $80 = potentially undervalued by 25%. Value investors seek this discount.
IPO (Initial Public Offering)
Corporate Action
When a private company first offers shares to the public, becoming publicly traded. Companies raise capital while early investors can cash out.
Example: Facebook's 2012 IPO priced at $38/share, raising $16 billion. Stock is now Meta Platforms trading significantly higher after initial volatility.
Large-Cap
Market Cap Category
Companies with market capitalization above $10 billion. Typically well-established, less volatile, and often pay dividends. Form the core of many portfolios.
Example: Apple ($3T), Microsoft ($2.8T), and Amazon ($1.5T) are mega-cap stocks, a subset of large-caps representing the biggest publicly traded companies.
Limit Order
Order Type
An order to buy or sell at a specified price or better. Provides price control but no guarantee of execution if the market doesn't reach your limit.
Example: Stock trading at $52, set limit buy at $50. Order only executes if price drops to $50 or lower, protecting against overpaying.
Liquidity
Market Characteristic
How easily an asset can be bought or sold without significantly affecting its price. High liquidity means narrow bid-ask spreads and easy execution.
Example: Apple stock (averaging 50M+ shares daily) is highly liquid—you can instantly buy/sell large quantities. Penny stocks may be illiquid with few buyers.
MACD (Moving Average Convergence Divergence)
Technical Indicator
Trend-following momentum indicator showing the relationship between two moving averages. Used to identify trend changes and generate buy/sell signals.
Example: When MACD line crosses above signal line, it generates a bullish signal. Histogram expanding shows strengthening momentum in that direction.
Margin Call
Risk Management
A broker's demand that an investor deposit additional funds or securities when the account value falls below the required maintenance margin level, typically occurring when leveraged positions move against the trader. Failure to meet a margin call may result in the broker liquidating positions.
Example: John borrows $50,000 to buy $100,000 worth of stock; when the stock value drops to $60,000, his broker issues a margin call requiring him to deposit $10,000 or sell assets to restore the required equity level.
Margin of Safety
Investing Principle
The difference between a stock's intrinsic value and its market price. Buying with a significant margin of safety protects against valuation errors and unexpected problems.
Example: Calculate intrinsic value of $100, require 30% margin of safety = only buy at $70 or below. This $30 buffer protects against estimation mistakes.
Market Capitalization
Metric
Total dollar value of a company's outstanding shares, calculated by multiplying share price by shares outstanding. Primary measure of company size.
Example: Company with 100M shares at $50/share = $5B market cap. Categorized as mid-cap, between small-cap ($300M-$2B) and large-cap ($10B+).
Market Maker
Market Participant
A firm or individual that continuously provides bid and ask quotes for securities, facilitating trading by maintaining liquidity and profiting from the bid-ask spread. They are obligated to buy and sell at publicly quoted prices during market hours.
Example: Citadel Securities acts as a market maker for thousands of stocks, quoting a bid of $50.00 and ask of $50.02 for a stock, earning the $0.02 spread on each transaction while ensuring investors can trade immediately.
Market Order
Order Type
An order to buy or sell immediately at the best available current price. Guarantees execution but not price, particularly risky in volatile or illiquid stocks.
Example: Place market buy for 100 shares—executes instantly at current ask price. Fast execution but you pay whatever sellers are asking at that moment.
Maximum Drawdown
Risk Measure
The largest peak-to-trough decline in portfolio value during a specific period, expressed as a percentage. Maximum drawdown measures the worst-case loss an investor would have experienced and is crucial for assessing downside risk tolerance.
Example: An investment portfolio peaks at $500,000 in January 2022, falls to $350,000 by October 2022 (the trough), then recovers to $450,000 by December. The maximum drawdown is 30% [($500,000 - $350,000) / $500,000].
Mid-Cap
Market Cap Category
Companies with market capitalization between $2 billion and $10 billion. Often offer growth potential of small-caps with more stability than pure small-caps.
Example: Companies like Snap Inc. or Caesars Entertainment at $8B represent mid-caps—past startup phase but not yet mega-corporations.
Modern Portfolio Theory (MPT)
Portfolio Theory
A framework for constructing portfolios that maximize expected return for a given level of risk through strategic diversification. MPT uses statistical measures (expected returns, standard deviations, correlations) to optimize asset allocation and demonstrates that portfolio risk is less than the weighted average of individual asset risks when assets are not perfectly correlated.
Example: Instead of investing $100,000 entirely in domestic stocks (risk: 18% standard deviation), an MPT-based investor allocates 60% to domestic stocks, 25% to international stocks, and 15% to bonds. Due to imperfect correlation, the portfolio's risk drops to 12% while maintaining 85-90% of the all-stock expected return.
Momentum Investing
Investment Strategy
A strategy that buys securities showing strong recent price performance and sells those with weak performance, based on the tendency of winning stocks to continue rising and losing stocks to continue falling in the near term.
Example: A momentum investor identifies stocks that have outperformed the S&P 500 by 15% or more over the past six months with increasing trading volume. She buys a basket of these top performers and holds them for 3-6 months, selling when relative performance weakens.
Moving Average
Technical Indicator
Average of stock prices over specified time period, recalculated daily as new data arrives. Smooths price action to identify trends and support/resistance.
Example: 50-day moving average sums last 50 closing prices divided by 50. Price above rising 50-day MA = uptrend. Below declining MA = downtrend.
Naked Short Selling
Trading Practice
The illegal practice of short-selling shares without first borrowing them or ensuring they can be borrowed, resulting in "failure to deliver" the shares to the buyer. This was banned by the SEC after contributing to the 2008 financial crisis.
Example: A trader sells 10,000 shares short without locating shares to borrow, hoping to find them later, but fails to deliver the shares within the required settlement period, violating SEC regulations.
Net Asset Value (NAV)
Fund Metric
The per-share value of a mutual fund or ETF, calculated by subtracting total liabilities from total assets and dividing by shares outstanding. NAV represents the price at which investors can buy or redeem fund shares and serves as a baseline for ETF trading.
Example: A mutual fund holds securities worth $100 million and has $5 million in liabilities. With 10 million shares outstanding, the NAV is $9.50 per share [($100M - $5M) / 10M shares].
P/E Ratio (Price-to-Earnings)
Valuation Metric
Stock price divided by earnings per share. Most common valuation metric, indicating how much investors pay for each dollar of earnings.
Example: Stock at $100 with $5 EPS = P/E of 20. Investors pay $20 for every $1 of earnings. Compare to industry peers to assess relative value.
Passive Investing
Strategy
Buy-and-hold strategy typically using index funds to match market returns rather than trying to beat them through active management. Lower costs and tax efficiency.
Example: Buy S&P 500 index fund and hold for 30 years, accepting market returns around 10% annually rather than attempting to pick winning stocks.
Payout Ratio
Metric
Percentage of earnings paid as dividends, calculated as dividends per share divided by earnings per share. Indicates dividend sustainability and growth potential.
Example: Company earns $4 EPS, pays $2 dividend = 50% payout ratio. Room to grow dividend. Over 100% = unsustainable, likely dividend cut ahead.
PEG Ratio (Price/Earnings to Growth)
Valuation Metric
P/E ratio divided by expected earnings growth rate. Helps normalize P/E for growth expectations. PEG below 1.0 may indicate undervaluation.
Example: Stock with P/E of 30 and 30% growth = PEG of 1.0. P/E of 30 with 15% growth = PEG of 2.0 (potentially overvalued relative to growth).
Portfolio
Investment Structure
The collection of all investments held by an individual or institution, including stocks, bonds, cash, real estate, and other assets.
Example: Balanced portfolio might include 60% stocks, 30% bonds, 10% cash—adjusted based on age, goals, and risk tolerance.
Protective Put
Options Strategy
A risk management strategy where an investor holding a long stock position purchases put options to hedge against potential price declines. This acts as portfolio insurance, capping downside losses while maintaining upside potential.
Example: You own 100 shares of GHI at $80 and buy a put with a $75 strike for $3; if GHI crashes to $50, your put limits losses to $8 per share ($5 decline + $3 premium), but if GHI rises to $100, you participate in the $20 gain minus the $3 premium cost.
Proxy Statement
Corporate Document
A document that public companies must file with the SEC and send to shareholders before annual meetings, containing information about matters requiring shareholder votes including board elections, executive compensation, and major corporate changes.
Example: Before her mutual fund's proxy vote on executive compensation, an investor reviews the proxy statement (Form DEF 14A) to understand the CEO's $12 million pay package. She votes against the proposal, believing it excessive relative to company performance.
Put Option
Options
A contract giving the buyer the right, but not the obligation, to sell an underlying asset at a specified strike price before or on the expiration date. Puts provide downside protection or allow speculation on price declines.
Example: You own 100 shares of ABC trading at $100 and buy a put with a $95 strike for $2; if ABC falls to $80, you can still sell at $95, limiting your loss to $7 per share ($5 decline + $2 premium).
Puttable Bond
Fixed Income
A bond that gives the bondholder the right, but not the obligation, to force early repayment of principal from the issuer at specified dates before maturity. This protects investors from rising interest rates or deteriorating credit quality.
Example: An investor holds a puttable bond paying 4%; if market rates rise to 6%, the investor can "put" the bond back to the issuer at par value and reinvest at higher rates.
Rebalancing
Portfolio Management
Periodically adjusting portfolio back to target asset allocation by selling overweighted assets and buying underweighted ones. Enforces "buy low, sell high."
Example: Target 60/40 stocks/bonds drifts to 70/30 after stock rally. Rebalance by selling 10% stocks, buying bonds to restore 60/40 allocation.
REIT (Real Estate Investment Trust)
Investment Type
Company that owns, operates, or finances income-producing real estate. Must distribute 90% of taxable income as dividends, offering high yields but taxed as ordinary income.
Example: Realty Income (O) owns thousands of commercial properties, pays monthly dividends yielding 5%+, offering real estate exposure without property management.
RSI (Relative Strength Index)
Technical Indicator
Momentum oscillator measuring speed and change of price movements on 0-100 scale. Above 70 = overbought, below 30 = oversold. Identifies potential reversals.
Example: Stock RSI drops to 25 after sharp decline—potential oversold bounce opportunity. But in strong downtrend, can stay oversold for extended periods.
Small-Cap
Market Cap Category
Companies with market capitalization between $300 million and $2 billion. Higher growth potential but greater volatility and risk than large-caps.
Example: Emerging companies with market caps around $1B often offer substantial growth if successful, but higher risk of failure than established large-caps.
Sector Rotation
Investment Strategy
An active investment strategy that shifts portfolio allocations among different market sectors based on economic cycles and anticipated performance, aiming to capture gains in outperforming sectors while reducing exposure to underperforming ones.
Example: As the economy exits recession, an investor rotates from defensive sectors (utilities, consumer staples) into cyclical sectors (technology, industrials, financials) that typically outperform during early expansion phases.
Short Squeeze
Market Event
A rapid price increase that occurs when heavily shorted stock rises, forcing short sellers to buy shares to cover their positions and cut losses, which further drives the price higher. This creates a cascading effect as more shorts are forced to cover.
Example: In January 2021, GameStop's stock surged from $20 to over $300 as retail investors on Reddit coordinated buying, forcing hedge funds with 140% short interest to cover positions at massive losses.
Sortino Ratio
Risk Metric
A risk-adjusted performance measure that divides excess return (above a target or risk-free rate) by downside deviation, penalizing only negative volatility unlike the Sharpe Ratio which penalizes all volatility. Higher Sortino ratios indicate better risk-adjusted returns.
Example: Fund A has an average return of 10%, target return of 3%, and downside deviation of 4%, yielding a Sortino ratio of 1.75. Fund B has the same 10% return but with downside deviation of 6%, yielding 1.17. Despite identical returns, Fund A better protects against downside risk.
Spread
Trading
The difference between the bid (buying) and ask (selling) prices. Narrow spreads indicate liquid markets; wide spreads suggest poor liquidity or volatility.
Example: Large-cap stock: bid $50.00, ask $50.02 (2¢ spread). Illiquid stock: bid $5.50, ask $6.00 (50¢ or 9% spread—significant trading cost).
Stop-Loss Order
Order Type
An order that becomes a market order once stock reaches specified stop price. Used to limit losses or protect profits by automatically exiting positions.
Example: Buy stock at $50, set stop-loss at $45. If price drops to $45, automatically sells to limit loss to $5/share or 10%.
Straddle
Options Strategy
An options strategy involving the simultaneous purchase (long straddle) or sale (short straddle) of both a call and put option at the same strike price and expiration. A long straddle profits from large price movements in either direction.
Example: You buy a straddle on JKL at $50 strike (buying both call and put for $5 total premium); if JKL moves to $60 or $40, one option gains significantly; you profit if the move exceeds your $5 breakeven in either direction.
Support Level
Technical Analysis
Price level where buying pressure is strong enough to prevent further decline. Previous lows and round numbers often act as support.
Example: Stock repeatedly bounces off $100 level—creates support. Traders buy near $100 expecting bounce, creating self-fulfilling prophecy.
Technical Analysis
Analysis Method
Study of historical price and volume patterns to forecast future price movements. Based on belief that price reflects all available information.
Example: Identifying head-and-shoulders pattern, RSI divergence, or moving average crossover to time entry/exit points for trades.
Tender Offer
Corporate Action
A public proposal by an investor or company to purchase some or all shareholders' stock at a specified price (usually at a premium to market price) by a certain date. Tender offers are commonly used in corporate takeovers and buyback programs.
Example: Company A offers to buy Company B's shares at $45 each when they're trading at $38, contingent on acquiring at least 51% of shares. Shareholders have 30 days to decide whether to tender their shares.
Trailing Stop Order
Order Type
A dynamic stop-loss order that automatically adjusts with favorable price movements, maintaining a set percentage or dollar amount below the market price for long positions. This locks in profits while allowing continued upside participation.
Example: An investor buys stock at $50 and sets a 10% trailing stop; as the stock rises to $70, the stop automatically adjusts to $63 (10% below), protecting $13 in gains while allowing further upside.
Total Return
Performance Metric
Complete investment performance including price appreciation plus dividends/interest reinvested. More comprehensive than looking at price change alone.
Example: Stock rises 8% and pays 2% dividend = 10% total return. Always evaluate total return, not just price movement, when comparing investments.
Value Stock
Stock Type
Shares trading below their intrinsic value based on fundamentals like P/E, P/B ratios. Often mature companies in out-of-favor sectors with lower growth but higher dividends.
Example: Financial stocks after 2008 crisis traded at low P/E and P/B ratios despite solid fundamentals, presenting value opportunities for patient investors.
Volatility
Risk Measure
Degree of price fluctuation over time, typically measured by standard deviation. Higher volatility = greater price swings = higher risk and potential reward.
Example: Blue-chip stock might fluctuate ±15% annually (low volatility). Biotech stock might swing ±50% (high volatility). Beta measures volatility vs. market.
Volume
Market Data
Number of shares traded during a specified period. High volume confirms price moves; low volume suggests weak conviction. Critical for validating breakouts.
Example: Stock breaks resistance on 3x average volume = reliable signal. Same breakout on below-average volume = likely false breakout, be cautious.
Underlying Asset
Derivatives
The specific financial instrument (stock, bond, commodity, currency, or index) upon which a derivative contract's value is based. The derivative's price movements are directly tied to changes in the underlying asset's value.
Example: In a call option on Apple stock, Apple shares are the underlying asset; the option's value increases or decreases based on movements in Apple's stock price.
Upside/Downside Capture Ratio
Performance Metric
Performance metrics comparing how a fund performs relative to its benchmark during up markets (upside capture) and down markets (downside capture). Upside capture above 100% indicates outperformance when markets rise; downside capture below 100% indicates the fund loses less when markets fall.
Example: Fund X has an upside capture ratio of 110% and downside capture of 85% versus the S&P 500. When the index gained 20% last year, Fund X gained 22% (110% capture). When the index fell 10%, Fund X only fell 8.5% (85% capture).
Yield Curve
Fixed Income
A graphical representation plotting the yields of similar-quality bonds against their maturities, typically showing U.S. Treasury bonds from 3 months to 30 years. The curve's shape (normal, flat, or inverted) provides insights into economic expectations and future interest rate movements.
Example: A normal yield curve slopes upward with 2-year Treasuries yielding 3%, 10-year at 4%, and 30-year at 4.5%; an inverted curve (short-term rates higher than long-term) has historically preceded recessions.
Yield
Return Metric
Income return on investment, expressed as percentage. For stocks, typically refers to dividend yield. For bonds, coupon yield or yield to maturity.
Example: Stock at $100 paying $4 annual dividend = 4% yield. Higher isn't always better—unsustainable yields often precede dividend cuts.
Year-to-Date (YTD)
Time Period
Performance measurement from January 1st of the current year through the present date. Common benchmark for evaluating investment returns.
Example: On July 1st, stock up 15% YTD means it gained 15% since January 1st. Allows comparison of performance across different starting points during year.
Yield to Maturity (YTM)
Fixed Income
The total return anticipated on a bond if held until maturity, expressed as an annual rate that accounts for the current market price, par value, coupon interest, and time to maturity. It assumes all coupon payments are reinvested at the same rate.
Example: A $1,000 bond with a 5% coupon trading at $950 with 10 years to maturity has a YTM higher than 5% because you're buying it at a discount and will receive $1,000 at maturity.