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Trading & Investing Basics
Financial Education Center
Trading and Investing Basics
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The Standard and Poor 500 index – ($SPX), more formally known as the S&P 500 Composite Stock Price Index, is a european–style, capitalization–weighted index (shares outstanding multiplied by stock price) of 500 stocks that are traded on the New York Stock Exchange, American Stock Exchange and Nasdaq National Market. The advantage of "cap–weighting" is that each company’s influence on index performance is directly proportional to its relative market value. It is this characteristic that makes the S&P 500 such a valuable tool for measuring the performance of actual portfolios.
The amount added to the net asset value of a mutual fund to determine the offering price.
Nickname for the Student Loan Marketing Association and the securities it issues.
The buying of one security and the selling of another security, usually of equal value, on the same day.
The market in which securities are traded after the initial (or primary) offering. Gauged by the number of issues traded. The over–the–counter market is the largest secondary market.
General name for all stocks and shares of all types. In common usage, stocks are fixed interest securities and shares are the rest, though strictly speaking, the distinction is that stocks are denominated in money terms.
Securities and Exchange Commission (SEC)
The federal agency created by the Securities Exchange Act of 1934 to administer that act and the Securities Act of 1933. The statutes administered by the SEC are designed to promote full public disclosure and protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce or through the mails must be registered with the SEC.
Securities Industry Automated Corporation (SIAC)
The computer facility and trade processing company for NYSE, AMEX, NSCC, and PCC.
Securities Investor Protection Corporation (SIPC)
Non–profit organization consisting of members of the securities industry who support it on an assessment basis. If a member should fail, that member’s customers are protected up to a maximum of $500,000, including up to $100,000 in cash.
The isolation of securities that the firm may not use for hypothecation or loan. The securities, which must be "locked up" by the firm, represent fully paid–for securities or the portion of a margin account in excess of loanable securities.
An advanced option order that combines the short selling of an equity and the selling of a put option on the same underlying stock.
A settlement that calls for delivery and payment according to the number of days specified by the seller.
Occurs when a contract brokerage firm’s client incurs a margin or maintenance call and does not settle the balance by settlement date. The firm then sells the securities at the best price available and the buyer is held liable for the price and costs.
An issue of bonds that matures over a period of years.
Type of bond maturity in which part of the issue matures at different times until the whole issue has matured.
Refers to options with the same underlying security, same expiration date, same exercise price and the same type.
The portion of a trader’s position that the firm has paid for and maintains. This is the portion that must be financed.
The day when a transaction is to be completed. On this day, the buyer is to pay and the seller is to deliver. Settlement is normally 3 business days on listed equities and 1 business day on listed options.
Settlement Date Inventory
The total of all positions in a security on settlement date, including fault, transfer, fails and elsewhere.
SFA (The Securities and Futures Authority, previously known as The Securities Association)
The Self–Regulating Organization responsible for regulating the conduct of brokers and dealers in securities, options and futures, including most member firms of the Exchange.
Account in which the customer has sold short securities. Before a customer may sell short, a margin account must be opened.
A phrase used to describe a short sale that is exempt from the short sale rules. For example, buying a convertible preferred, submitting conversion instructions, and selling the common stock before the stock is received.
The total number of shares of a security that have been sold short by customers and securities firms that have not been repurchased to settle short positions in the market.
(1) A position in a customer’s account in which the customer either owes the firm securities or has some other obligation to meet. (2) Any position on the firm’s security records having a credit balance.
The sale of securities that are not owned or that are not intended for delivery. The short seller "borrows" the stock to make delivery with the intent to buy it back at a later date at a lower price.
Short Sale Rule
You cannot short sell a stock at or below the bid if the last bid tick was a downtick. A downtick is defined by Nasdaq as the condition when the current bid is lower than the previous bid. The simplest way to tell if you can short sell a stock is to get a quote on it (see "market maker quote boxes" later in this guide) and look at the bid tick symbol just to the right of the stock symbol. If it is a down arrow, you cannot short sell the stock at or below the bid. If it is an up arrow, you can short sell the stock at the bid or higher. The red down arrows and green up arrows in your Ticker window also tell you if the last movement was a down tick or up tick.
Bonds which mature within five years.
The profit realized from the sale of securities or other capital assets held twelve months or less.
Standard Industrial Classification (SIC) code. A numbering system established by the Office of Management and Budget that identifies companies by industry. It is used to promote the comparability of economic statistics from various facets of the U.S. economy.
The number of shares available in a quote. For example, if the quote and size on a stock is 9–3/8 to 9–1/2 3x5, it means that the bid is 9–3/8, the offer is 9–1/2, 300 shares are bid, and 500 shares are offered.
A member of certain SEC–regulated exchanges who must make a market in assigned securities. Specialists also act as two–dollar brokers in executing orders entrusted to them.
Giving stock dividend in another CUSIP, usually a subsidiary.
A mutual fund or unit trust that contains Treasury securities and other types of investments.
The difference between the bid and offer sides of a quote.
An advanced option order that combines the purchase and sale of two puts or two calls on the same underlying security.
SRO (Self–Regulating Organization)
An organization recognized by the SIB and responsible for monitoring the conduct of business by, and capital adequacy of, investment firms.
A security that represents ownership in a corporation and that is issued in "shares."
Refers to a limit order that has not been executed because of other orders at the same limit that were entered earlier.
A dividend paid by corporations from retained earnings in the form of stock. The corporation declares the dividend as a percentage of shares outstanding.
A form that may be endorsed in lieu of endorsing the back of the stock certificate.
A ledger on which all security movements and positions are recorded. The record is usually in two formats: One shows movements of the security the previous day and the other shows the current security positions.
The exchange of existing shares of stock for more newly issued shares from the same corporation. Since the number of shares outstanding increase, the price per share goes down. Splits do not increase or decrease the capitalization of the company, just redistributes it over more shares. The effect is the adjustment to the trading price.
A unique four– or five–letter symbol assigned to a Nasdaq security. If a fifth letter appears, it identifies the issue as other than a single issue of common stock or capital stock. A list of fifth–letter identifiers and a description of what each represents follows:
A – Class A
B – Class B
C – Issuer qualifications exceptions*
D – New
E – Delinquent in required filings with the SEC
F – Foreign
G – First convertible bond
H – Second convertible bond, same company
I – Third convertible bond, same company
J – Voting
K – Nonvoting
L – Miscellaneous situations, such as depositary receipts, stubs, additional warrants, and units
M – Fourth preferred, same company
N – Third preferred, same company
O – Second preferred, same company
P – First preferred, same company
Q – Bankruptcy Proceedings
R – Rights
S – Shares of beneficial interest
T – With warrants or with rights
U – Units
V – When–issued and when distributed
W – Warrants
Y – ADR (American Depositary Receipt)
Z – Miscellaneous situations such as depositary receipts, stubs, additional warrants, and units.
* The letter "C" as a fifth character in a security symbol, indicates that the issuer has been granted a continuance in Nasdaq under and exception to the qualification standards for a limited period.
Company’s net worth. Total liabilities are subtracted from the total assets to arrive at this figure.
Stop Limit Order
This order is similar to a stop order, but it becomes a limit order instead of a market order when the price is reached or passed. Buy stop limit orders are entered above the current market; sell stops are extended below it.
A memorandum order that becomes a market order when the price is reached or passed. Buy stops are entered above the current market price; sell stops are entered below it.
Simultaneous long or short positions of puts and calls having the same underlying security and same strike price.
An option strategy that refers to writing a call and a put with different strike prices on the same underlying security.
A form of registration in which securities are registered in the name of a brokerage firm, bank, or depository; it is acceptable as good delivery.
Strike (Exercise) Price
The price at which an option can be exercised. For example, the owner of a call ABC April 40 can call in (buy) 100 shares of ABC at 40; the strike price is 40.
A quote given to indicate the current market status but is not to be taken as a firm ask or bid.
A debenture whose claim to interest and principal of the corporation comes after those of regular debentures and other debt securities.
A stockholder’s right to maintain his proportionate ownership in the company by being given the opportunity to buy newly issued stock before the general public.
A contract issued by the clearing corporation that includes the total of the regular way contract, adjustments made through advisories, and adds by seller processing.
A price at which a particular stock may tend to stop its momentum when moving downward. This type of technical indicator exists for varying reasons and is specific to each individual stock.
Surprise (Earnings Surprise)
A company earnings report that differs (either positively or negatively) from what analysts were expecting (consensus forecast). This often causes movement in the stock’s price. See Consensus Rating. Special symbols are used for negative actual or expected earnings as follows:
N+ : Negative actual earnings with positive surprise
N– : Negative actual earnings with negative surprise
–+ : Negative consensus earnings with positive actual earnings
–0 : Negative consensus earnings with zero actual earnings
–VL: Very large negative percent surprise
+VL: Very large positive percent surprise
NA : Not available (data necessary for calculation are not available)
A dramatic reversal in either the market or a trader’s profit/loss.
A Syndicate Bid can be entered in the Nasdaq System to stabilize the price of a Nasdaq security prior to the effective date of a registered secondary offering. This activity is permissible under SEC Rule 10b–7.
The acquisition of control over a corporation by another company, which normally ousts the current management. The takeover can occur by means of a proxy fight or the acquisition of a controlling quantity of common stock.
The Exchange’s computerized settlement system.
A mutual fund containing bonds that mature in a single year, giving the entire fund a terminal maturity in that year.
Tax Anticipation Bill
Short–term security similar to a T bill that is accepted at par in payment of corporate federal taxes.
Tax Anticipation Note
A municipal note issued in anticipation of revenues from a future tax.
Tax Exempt Bonds
Municipal securities (whose interest is free from federal income tax).
Tenants In Common
A joint account in which the death of one of the owners would cause his/her share of the account to be retained by his/her estate.
The offer made by one company or individual for shares of another company. The offer may be in the form of cash or securities.
Bonds of an issue all mature on the same date.
Term Structure of Interest Rates
A graph representing the yield to maturity of Treasury securities at identified years of maturity.
The maximum share size that Nasdaq allows to occur for a singular trade in the SOES system. Also referred to as "Tier Size" and "SM Level."
Written verification and information concerning a transaction that is sent to the customer on or before the first business day following the trade date.
The day a trade occurs.
Transferable Options with the right to buy and sell a standardized amount of a security at a fixed price within a specified period.
Written permission for one to trade in another’s account.
The process by which securities are reregistered to new owners. The old securities are canceled and new ones issued to the new registrants.
A commercial bank that retains the names and addresses of registered securities owners and that reregisters traded securities to the name of the new owners.
Obligations issued by the Department of the Treasury maturing in 13, 26, or 52 weeks.
Long–term (10 to 30 years), fixed interest government debt security.
The program through which investors may purchase new issues of Treasury bills, notes, and bonds directly from the Federal Reserve.
Medium–term (1 to 10 years), fixed interest government debt security.
Written agreement between a corporation and its debt issue holders stating interest rates, maturity dates, collateral, etc.
An exchange member who executes orders from other member firms and charges a fee for each execution.
Two Sided Market
The obligation imposed by the NASD that Nasdaq Market Makers make both firm bids and firm asks in each security in which they make a market.
Refers to an option being either a put or a call.
The security on which options are being bought or sold.
The bid or bids that are listed in the Level II Nasdaq market but are not the best (highest) bid price.
The security on which options are being bought or sold.
Underwriter (Investment Banker)
In a municipal underwriting, a brokerage firm or bank that acts as a conduit by taking the new issue from the municipality and reselling it. In a corporate offering, the underwriter must be a brokerage firm.
The process by which investment bankers bring new issues to the market.
(1) In a negotiated underwriting, the investment banker whose client is the corporation wanting to bring out a new issue. (2) In a competitive underwriting, the lead firm in a group that is competing with other group(s) for a new issue.
Uniform Gift to Minors Accounts (UGMA)
A method of securities ownership whereby parents or other relatives may contribute cash or securities to children. Portions of returns generated by the securities are taxed at the children’s tax bracket instead of parents’ presumably higher bracket.
Uniform Practice Code
Part of the NASD rules that govern the dealing of firms with each other.
At issuance, a "package" of securities, such as a bond and warrant, which become separable at a later date.
Unit Investment Trust
An investment company organized under a trust indenture that sells interest in its portfolio in terms of redeemable securities.
Similar to a mutual fund. A portfolio of securities, including mortgage–backed securities, offered by a brokerage or mutual fund.
Unlisted Securities Market (USM)
The Exchange’s market for medium–sized companies which do not qualify for, or do not wish to have a full listing.
(1) A security which has not been admitted to the Stock Exchange’s Daily Official List. Usually the issuer will be an unlisted company, but not always; it is not uncommon for a company to apply for its Ordinary Shares to be listed but not its loan stocks, or vice versa. (2) A security traded on the USM.
An advanced option order that is used with the intention of closing an existing Buy/Write or Sell/Write position.
A listed equity trade at a price that is higher than that of the last sale.
U.S. Treasury Bill (T Bill)
The shortest–term instrument issued by the federal government. The maturities of these discounted issues do not exceed one year at issuance, with three–month (90–day) or six–month (180–day) paper being very common.
U.S. Treasury Bond (T Bond)
The longest–term debt of the federal government, issued in coupon form for period of 10 to 30 years.
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