Stock Market Education: Definition of Terms

MARGIN CALL: If your account falls below minimum maintenance, your broker will issue a margin call for you to either deposit more more or sell securities to correct the situation.

MARKET CAPITALIZATION: Market capitalization or market cap is a way of measuring the size of a company and is calculated by multiplying the current stock price by the number of outstanding shares.

MARKET ORDER: A market order to buy or sell placed with your broker requests the best price at that moment. Brokers fill market orders first before other pending orders.

MARKET TIMING: Market timing is the attempt to know when market lows and highs are going to occur. It is the short-term pursuit of buy low and sell high and almost always fails over the long run.

OPTIONS: Options give the owner the right, but not the obligation, to purchase or sell a specific number of shares of a stock at a specific price. Options are bought and sold on the open market.

ONLINE BROKERS: Online brokers allow investors to buy and sell securities over the Internet without ever talking to a human. Online brokers often offer the least expensive commissions.

PENNY STOCKS: Penny stocks are a special category of low priced, usually $1 or less, stocks often issued by highly speculative companies. They are frequently the focus of stock scams and manipulations.

POSITION: Position describes your current holdings. If you owned 100 shares of IBM, your position would be “long 100 IBM.”

PREFERRED STOCKS: As the name implies, preferred stock is a different class of stock with additional rights not granted to common stock owners. Among these rights is first call on dividends. Investors buy preferred stock for its dividend income.

PRICE EARNINGS RATIO: The price/earnings ratio (P/E) is a way to show how a company’s earnings relate to the stock price. The P/E is calculated by dividing the current price of the stock by the annual earnings per share. The higher the P/E the more earnings growth investors are expecting and the higher premium they are willing to pay for that anticipated growth.

PROSPECTUS: A prospectus is a legal document that potential shareholders of an initial public offering of a stock must have before they can invest. It lists complete financial details of the company as well as the associated risks of the investment. A prospectus is also required for mutual funds and any regulated security.

RISK TOLERANCE: Risk tolerance is how much risk you are willing to take to achieve an investment goal. The higher your risk tolerance, the more risk you are willing to take.

ROUND LOT: A round lot is the standard transaction unit in stocks and is 100 shares. Any order not divisible by 100 is considered an odd lot and may trigger an additional fee from your broker.

SHORT SELLING: Short selling is where you sell a stock you do not own in anticipation that the price is going to fall. Your broker will “borrow” the stock from another client. You sell the stock and put the money in your account. If you are correct, you buy back the stock at the lower price and pocket the profit. The original owner then gets the stock back. This all perfectly legal.

SMALL CAP STOCK: A small cap stock is any company with a market capitalization of $1 billion or less.

TECHNICAL ANALYSIS: Technical analysis is a form of stock evaluation that relies on stock data, such as price movement, volume, open interest to predict future price trends. Technical analysis is not concerned with the business, but focuses strictly on the data, using charts and graphics to spot trends and certain buy and sell points.

VALUE STOCK: A value stock is one that is under priced by the market for reasons that have nothing to do with the business itself.

WARRANT: Warrants give the holder the right, but not the obligation, to purchase a specific number of shares of a stock at a specified price. Warrants are often issued along with new stock as an incentive to investors.