Stock Trading Terms

Question 1

Strike Price

Answer 1

The price of the underlying security an option owner can buy or sell at.

Question 2

Ticker Tape

Answer 2

Shows completed trades.

Question 3

Call option

Answer 3

A call option gives the owner the right, but not the obligation, to buy a security at a predetermined price within a specific time. A call option is bought for leverage or for limiting your risk.

Question 4

Put Option

Answer 4

A put option gives the owner the right but not the obligation to sell a security at a predetermined price within a specific time. A put option is sold for leverage or for limiting your risk.

Question 5

Short Selling

Answer 5

Speculating that the security will drop in value by selling a not yet owned security and then looking to buy it back at a lower price. The short seller then returns the borrowed securities.

Question 6

Paper Trade

Answer 6

When a trade is not taken with real money but merely “written down” in order to keep a record. A risk free way of testing a trading strategy.

Question 7

Net Worth

Answer 7

The sum between a company or person’s total assets and total liabilities.

Question 8

Market Order

Answer 8

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

Question 9

Market Capitalization

Answer 9

Also referred to as Market Cap. The total value of a company which is calculated by multiplying total amount of shares with stock price.

Question 10

Margin Account

Answer 10

An account that uses credit from the brokerage firm to buy or sell short securities. The client will be charged interest on the credit. The client will have to deposit a margin amount to get the credit.

Question 11

Long

Answer 11

Owning the security.

Question 12

Short Selling

Answer 12

Speculating that the security will drop in value by selling a not yet owned security and then looking to buy it back at a lower price. The short seller then returns the borrowed securities.

Question 13

Mutual Fund

Answer 13

A fund which invests in any available instrument, stocks, bonds etc. Mutual fund units can be bought and sold through a brokerage firm.

Question 14

Hedge Fund

Answer 14

A fund which invests in any available instrument but more aggressively than a mutual fund as the hedge fund is exempt from many rules so it can both short sell, use leverage etc.

Question 15

Leverage

Answer 15

1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
2. The amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be highly leveraged.

Question 16

Derivative

Answer 16

A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Question 17

Commodity

Answer 17

1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
2. Any good exchanged during commerce, which includes goods traded on a commodity exchange.

Question 18

Subsidiary

Answer 18

A company whose voting stock is more than 50% controlled by another company, usually referred to as the parent company or holding company. A subsidiary is a company that is partly or completely owned by another company that holds a controlling interest in the subsidiary company. If a parent company owns a foreign subsidiary, the company under which the subsidiary is incorporated must follow the laws of the country where the subsidiary operates, and the parent company still carries the foreign subsidiary’s financials on its books (consolidated financial statements). For the purposes of liability, taxation and regulation, subsidiaries are distinct legal entities.

Question 19

Merger

Answer 19

The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.

Question 20

Securities And Exchange Commission - SEC

Answer 20

A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce, through the mail or on the internet must be registered with the SEC.

Question 21

Liquidity

Answer 21

1. The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.
2. The ability to convert an asset to cash quickly. Also known as “marketability.”

There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios.

Question 22

Spread

Answer 22

Definition of ‘Spread’

1. The difference between the bid and the ask price of a security or asset.
2. An options position established by purchasing one option and selling another option of the same class but of a different series.

Question 23

Ask

Answer 23

The price a seller is willing to accept for a security, also known as the offer price. Along with the price, the ask quote will generally also stipulate the amount of the security willing to be sold at that price.

Sometimes called “the ask.”

Question 24

Bid

Answer 24

Definition of ‘Bid’

1. An offer made by an investor, a trader or a dealer to buy a security. The bid will stipulate both the price at which the buyer is willing to purchase the security and the quantity to be purchased.
2. The price at which a market maker is willing to buy a security. The market maker will also display an ask price, or the amount and price at which it is willing to sell.

Question 25

Compounding

Answer 25

Generating earnings from previous earnings

Question 26

Dollar Cost Averaging (DCA)

Answer 26

The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.

Also referred to as a “constant dollar plan.”

Question 27

Margin

Answer 27

1. Borrowed money that is used to purchase securities. This practice is referred to as “buying on margin”.
2. The amount of equity contributed by a customer as a percentage of the current market value of the securities held in a margin account.
3. In a general business context, the difference between a product’s (or service’s) selling price and the cost of production.
4. The portion of the interest rate on an adjustable-rate mortgage that is over and above the adjustment-index rate. This portion is retained as profit by the lender.

Question 28

Equity

Answer 28

Ownership of an investment

Question 29

Debt Security

Answer 29

Investors are creditors that have to be paid off by the company

Question 30

Dealer/Principal

Answer 30

Holds the investment to directly sell to customers

Question 31

Convertible Bond

Answer 31

A bond that can be converted into a predetermined amount of the company’s equity at certain times during its life, usually at the discretion of the bondholder.

Question 32

Par Value

Answer 32

The face value of a bond. Par value for a share refers to the stock value stated in the corporate charter. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. Par value for a bond is typically $1,000 or $100. Shares usually have no par value or very low par value, such as 1 cent per share. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond’s credit status. In the case of equity, par value has very little relation to the shares’ market price.

Also known as nominal value or face value.