Glossary
Annualized gains are the return of an investment expressed as an annual percentage. In short, they calculate what would happen if a trade’s success was repeated over the course of a year.
Because of this, annualized gains are a key tool for comparing the returns of investments with different timeframes.
They’re calculated by taking the timeframe of a trade and figuring out how many of those periods fit in a year. That number is then multiplied by the gains. For example, if a trade lasts for three months, there are four three-month periods in a year. So if the trade returns 10%, your annualized gain is 40% (four times 10%).
An annuity is a financial product that people pay into to receive future disbursements. These are sold by financial institutions designed to collect payments from a recipient up until a point where the funds are paid as a steady stream of income to the recipient. Many different types of annuities exist. For instance, annuities can be structured so that, upon maturity, payments will only continue for the life of the recipient and/or their spouse. They can also be structured for a specific time period, regardless of how long the recipient lives. There are also fixed annuities, which have fixed payouts, and variable annuities, where the payments may vary based on the performance of the underlying investments. These can be very complicated contracts that require close examination by the recipient.
Arbitrage is a general Wall Street term that means the simultaneous purchase and sale of an asset to take advantage of small differences in prices.
While “arbitrage” often involves complicated securities and strategies, you can think of it with a simple example of two booksellers just a few miles away from each other.
Let’s say Bookseller A is selling a book for $20 and Bookseller B is selling the same book for $15. If you could buy the book from Bookseller B for $15 and sell it to Bookseller A for $19, you could buy Bookseller B’s entire inventory, sell it to Bookseller A, and make a profit of $4 per book.
The balance sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
The balance sheet always follows this formula: Assets = Liabilities + Shareholders’ Equity.
The balance sheet is one of the “big three” financial statements a publicly-traded company is required to disclose to the public and the SEC. The other two are the balance sheet and the statement of cash flow.
A bond is a way for investors to earn a pre-determined rate of income for a specified time period (until maturity). A bond is essentially a loan to a corporation or government for a defined period of time with a specified interest rate. The holder of the bond is the lender (creditor), the issuer is the borrower (debtor), and the coupon is the interest rate (the excess rate the issuer pays to the holder). They are typically used by companies/governments to finance a variety of projects.
They are one of the three main asset classes, along with stocks and cash equivalents. Unlike stocks, bonds are debt – not equity. Many investors use bonds to diversify their portfolios and/or earn steady income.
There are many different types of bonds, but the primary categories include investment-grade bonds, corporate high-yield (junk) bonds, municipal bonds, and U.S. Treasury bonds.
A bond’s “coupon rate” is the stated annual interest rate when a bond is issued. The coupon is typically paid semi-annually. For example, if a $1,000 bond has a 10% coupon rate, it will pay two $50 payments per year for an annual return of $100.
The bond coupon rate should not be confused with bond yield, which is calculated by dividing the interest rate by the current bond price.
Book value per share is the ratio of shareholder equity to the average number of shares of common stock outstanding. It indicates the accounting value of each share of stock.
Unlike market value per share, book value per share is an accounting measure that is not an indicator of what investors believe a company’s shares are worth. If the market value per share is lower than the book value, the stock price is typically going to be undervalued.
To calculate book value per share: (Shareholder’s equity – preferred stock) / average outstanding common stock.
A “breakout” is a technical analysis term that refers to the price of an asset reaching either a new high point or a new low point for a given time period. An “upside breakout” is when the asset hits a new high. A “downside breakout” is when an asset hits a new low.
Breakouts can be either short-term (about five or 10 days) intermediate-term (like more than 30 days) or long-term (more than 200 days).
Breakouts serve as a starter’s pistol to signal the beginning of a trend. No uptrend can start without an upside breakout… And no downtrend can start without a downside breakout.
Buybacks, or “share buybacks,” are when a company repurchases its own stock to reduce the amount of shares available on the market. By reducing the number of shares on the market, buybacks proportionally increase a shareholders stake in the business – thus making shares more valuable. Businesses will buy back shares when they believe their stock is undervalued. Therefore, buybacks are one of the ways businesses reward shareholders.
The frequency and volume of share buybacks has increased in recent years as the tax rate on dividends has risen. Since investors don’t pay taxes on the cash business reinvest in their own stock, buybacks can be viewed as a sort of tax-free dividend. This is why some people call buybacks “stealth dividends.” Buybacks are also generally viewed as a good buy signal for the underlying stock.
A “call option” is a financial contract that gives you the right (but not the obligation) to buy – or “call away”– another investor’s asset at a set price (the “strike price”) at any time up through the option’s expiration date (normally market close on the third Friday of the month).
Investors who trade call options expect the stock to move higher over time.
When you buy a call option, you pay a premium for the right to buy a stock at a later date. This strategy allows you to invest a smaller amount than buying shares outright, and still benefit if the stock increases in value.
If the stock rises above the strike price at any time through the option expiration date, then you can purchase the shares at a discount to market value. If the stock doesn’t reach the strike price by the expiration date, the contract expires worthless, and you lose only the money you paid for the contract.
When you sell (“write”) a call option, you receive a premium in return for agreeing to sell your stock at a later date. This strategy allows you to earn income on a stock while offsetting potential losses if the stock collapses.
CAPE is an acronym for “cyclically-adjusted price-to-earnings” ratio.
Also known as the Shiller P/E ratio or P/E 10, this ratio is the price-to-average-earnings from the past 10 years. It’s calculated by taking the current price divided by the average inflation-adjusted earnings from the previous 10 years.
Because earnings are over a long period, the CAPE ratio helps “smooth” out the often extreme ups and downs that can occur in a business cycle. Because of this, it’s used to measure the market’s true valuation.
A closed-end fund is a type of ETF or mutual fund. But unlike most mutual funds, closed-end funds issue a limited number of shares at the outset. Since no new shares are issued to meet demand, the market values of closed-end funds fluctuate and do not necessarily reflect their underlying value or “net asset value” (NAV).
When closed-end funds are trading at a discount to their net asset value, it’s usually a good time to buy. You can purchase them on the stock market, where they trade just like any other stock or mutual fund.
A “covered” call is a call option trade on a stock you already own.
Investors who sell (“write”) covered call options expect the stock to move higher over time.
If you sell a covered call, you’re obligated to sell your shares if they reach the strike price by the option expiration date. If the option holder exercises his right to buy your shares, you collect capital gains in addition to the option premium, since the strike price will be higher than your original purchase price.
If the stock doesn’t reach the strike price by the expiration date, you get to keep your shares along with the premium you received for the contract. By selling covered calls, you can increase your annual returns and offset any potential losses if a stock you own collapses.
A defensive stock is a safe stock that provides consistent dividend growth and stable earnings no matter the state of the overall economy or stock market. They remain stable during the ups and downs of the business cycle.
This class of stocks includes what Stansberry Research editor Dan Ferris calls “World Dominators.” These are extremely consistent businesses such as McDonald’s, Microsoft, Wal-Mart, etc.
Earnings per share is the amount of profit per share a company generates. It is a common measuring stick of how well a company is doing during one period of time versus another period of time.
For example, if a company generates $5 million in profit and has one million shares outstanding, the earnings per share would be $5.
EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization.
It does not represent cash earnings, capital expenditures, or working capital. Because of this, EBITDA can be misleading about a company’s earnings. For example, while a negative EBITDA indicates that a company is not profitable, a positive EBITDA does not necessarily mean that a company is generating cash.
And since EBITDA is not defined by the Generally Accepted Accounting Principles (GAAP), companies often change how they calculate their EBITDA from one reporting period to the next to dress up earnings. So it’s important not to solely rely on EBITDA.
ETF is an acronym for exchange-traded funds.
ETFs allow shareholders to get liquid, “one-click” diversification over a large cluster of assets. They are essentially exchange-traded mutual funds. ETFs exist for a variety of asset classes, including stocks, bonds, commodities and even derivatives.
Index ETFs, such as the SPDR S&P 500 ETF (SPY), allow shareholders to gain low-cost exposure to the entire S&P 500, for a tiny fraction of the total index value.
Beware – some actively managed ETFs can have expensive fees, and some commodity and derivative ETFs are only meant for short-term trading. Be sure to read the prospectus before investing.
ETFs also come in two main varieties; open-end funds and closed-end funds.
A Form 10k is a mandatory, detailed annual financial report that the SEC requires to be filed by publicly traded corporations. The 10-K includes information such as audited financial statements, company risks and outlook, organizational structure, executive compensation, subsidiaries, among other information.
These forms are typically more detailed, audited versions of the quarterly Form 10Q.
A Form 10Q is a comprehensive report of a company’s performance that must be submitted quarterly by all public companies to the SEC.
It contains similar information to the annual Form 10-K, however the information is generally less detailed, and the financial statements are generally unaudited. These reports generally compare this quarter with the previous quarter and the same quarter last year.
The income statement is a financial statement that provides a summary of a company’s financial performance over a given accounting period. It shows how the business earned its revenues (also known as sales) and the expenses incurred in order to generate those revenues. The statement also shows the company’s net profit or loss over the fiscal period.
The income statement is one of the “big three” financial statements a publicly-traded company is required to disclose to the public and the SEC. The other two are the balance sheet and the statement of cash flow.
An Index fund is a type of mutual fund or ETF that tracks an index, such as the S&P 500, and mirrors its performance.
It’s a form of passive investing – buying an investment and holding it – that regularly outperforms most actively managed mutual funds. Index funds also give investors broad exposure to a market while having lower operating expenses than other mutual funds.
Insider buying is the purchase of a company’s shares by those who work for the company, or have access to material, non-public information. These insiders are typically known as officers (such as CEOs, CFOs, etc.) or directors. Insider buying, which is completely legal as long as it is reported to the SEC, should not be confused with insider trading – which is illegal. Insider buying is generally viewed as a buy signal, since these insiders typically have access to non-public information. Studies have shown that following insider purchases tends to beat overall market returns. As fund manager Peter Lynch famously said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
Investors can track insider transactions by following submissions of the SECs Form 4.
Intrinsic value is the actual value of an asset, instead of its market value (which is influenced by market conditions such as investor sentiment). Investors use different techniques to calculate intrinsic value, like a company’s price-to-earnings ratio, cash flow, and/or book value. Investors commonly use intrinsic value to buy assets that are underpriced in the market.
For options, intrinsic value is the amount an option is “in-the-money.” (Only options that are in-the-money have intrinsic value.) For call options, it’s the difference between the underlying stock’s current price and the strike price. For put options, it’s the difference between the option’s strike price and the underlying stock at its current price.
IPO is an acronym for “Initial Public Offering.”
An IPO is the first sale of shares of a private company to the public. In short, it’s the “introduction” of a new publicly traded company. IPOs help private companies with big growth plans access capital. Once a company has decided to go public, an investment bank helps value shares of the company by estimating future revenues and earnings.
IPOs can be risky investments. The process is dominated by Wall Street banks and other insiders who want to sell shares to the public at the highest possible price. So investors will often see super-high growth numbers well above what the company can deliver immediately… or ever. Because of this, long-term investors are almost always left “holding the bag” when the company’s future results don’t match the hype.
Large-cap is a term used to describe companies with a market cap between $10 billion and $100 billion. These are typically large, safe, reliable companies that are more likely to pay out dividends and less likely to go out of business. Although they are less risky, their stock prices typically don’t grow as fast as smaller-cap stocks.
The dollar amounts used for the three market cap classifications (“large cap,” “mid cap,” and “small cap”) are approximations that typically change over time.
Leverage is borrowed capital used to increase the potential return of an investment (also known as margin), or it can refer to the amount of debt used to finance a firm’s assets. Companies that have high levels of debt are known as highly leveraged.
Leverage is commonly used by investors in options or in real estate transactions by using mortgages to purchase a home.
An example of leverage would be a mortgage with a 20% down payment on a $500,000 house. In short, the investor is using a small percentage of their money ($100,000) to buy the house. If the house appreciates 5% each year, the investor now owns an asset worth $525,000 (a $25,000 gain). If the investor didn’t use leverage and instead bought a $100,000 house that appreciates 5% each year, it would be worth $105,000 (a $5,000 gain). So the investor can make $20,000 more from the same $100,000 dollars with leverage.
However, leverage can also be risky. While there’s potential for greater profit, there’s also the potential for greater losses. Individual investors risk losing much more than if they hadn’t used leverage. And companies that are highly leveraged risk going bankrupt and destroying shareholder value if things get bad. That’s why smart investors tend to stay away from highly leveraged companies and use leverage sparingly in their own investments.
Liquidity is how fast an asset can be bought or sold. Assets that can be converted to cash quickly are known as liquid assets, and in reverse, assets that cannot be converted quickly to cash are known as illiquid.
Liquid assets, like stocks, mutual funds, and bonds, are thought of as safer than illiquid ones, like art or real estate, because it’s quicker and easier to get in and out of the investment.
Margin is a form of credit made available to investors by their broker. It allows people to buy more securities than they’d be able to normally, which can amplify their gains (or losses) through leverage.
For example, say you buy $4,000 worth of stock in company ABC with $2,000 of margin and $2,000 of cash. The company is trading at $10. Normally, you would only be able to buy 200 shares (200 x $10 = $2,000). But with margin, you can buy 400 shares (400 x $10 = $4,000). If the share price rises to $20 and you sell your shares, you would collect $8,000 on the 400 shares. After paying back the loan, you would make $6,000 (without taking into account interest and broker commissions). That’s a 200% gain. If you didn’t use margin, you would make $4,000 on the price move – a 100% gain.
However, margin can be risky. If company ABC falls to $4, your investment on 400 shares would be worth $1,600. After paying your broker back the $2,000 loan, your total loss would be $2,400 – more than you initially invested. And if a stock’s price dives, your broker can sell off your securities – locking you in to a loss.
Market cap is an abbreviation for market capitalization.
It’s used to express the total value (or size) of a company. The basis of the number is simply share price multiplied by the number of shares outstanding – i.e. the total value of a company’s outstanding shares.
Companies are typically referred to as “micro-cap,” “small cap,” “mid cap,” “large cap,” or “mega cap.”
Mega-Cap is a term used to describe the largest publically traded companies on the planet. Although there is no exact definition, mega-caps are generally household names with a market capitalization that exceeds $100 billion.
Most mega-caps are what we’d refer to as World Dominating Dividend Growers.
Micro-Cap is a term used to describe the smallest publicly traded companies on the planet. It typically refers to businesses with a market cap between approximately $50 million and $300 million. Micro-cap companies are generally riskier than all the other classes, but have greater potential returns.
Mid-cap is a term that refers to stocks with a market capitalization in-between small-cap and large-cap companies.
Mid-cap companies generally have market capitalizations between $5 billion and $10 billion. Mid-cap stocks can have the attributes of both large-cap and small-cap companies. They are more established than small-cap stocks (so they’re less volatile), while still offering more growth potential than large-cap stocks.
MLP is an acronym for “Master Limited Partnership.”
MLPs are a way for individual investors to earn tax-deferred income from energy transportation companies. For example, most MLPs own vast networks of oil and gas pipelines, receiving stable income streams as “toll collectors.” Other types of MLPs include coal and timber transportation. Because they typically act as toll collectors, they are less sensitive to fluctuations in resource prices.
Like REITs, MLPs receive special tax treatment from the government – allowing them to pass along more income to investors. Additionally, MLP shares are technically known as “units,” and dividends are called “distributions.” This means that income received from MLPs are not taxed as dividends or income. Income is usually taxed at the capital gains rate, and not applied until units are sold. Important Note: MLPs are not ideal for tax-deferred retirement accounts. You should consult a tax professional before investing in MLPs.
A Municipal bond is essentially a loan made to state and municipal governments. Governments use this money to build roads, schools, or other public buildings. To encourage investors to invest in the government, interest received from “muni” bonds is exempt from federal income tax, and in many cases, state and local income taxes.
Muni bonds are also one of the safest investments. You see, governments use their taxing authority as a promise to pay back investors and make interest payments. If things get tight, the municipality can always raise taxes. Also, municipal bonds are among the first things a municipality has to repay in a default case. So the interest and principal repayment is nearly certain.
This makes muni bonds popular with those seeking safe income, especially in high-income tax brackets.
A mutual fund is a professionally managed investment vehicle that pools money from investors and gives them access to diversified portfolios of equities, bonds, stocks, and other types of securities. Each investor owns shares that represent a portion of the holdings in the fund.
Investors use mutual funds to add to their portfolio and diversify their holdings for a much lower price than purchasing each security individually.
There are three main types of mutual funds – open-end funds, closed-end funds, and unit investment trusts.
A “naked” call is a call option trade on a stock you don’t already own.
Investors sell naked calls if they believe the stock price will remain flat or fall lower than the strike price.
If you sell a naked call, you’re obligated to sell shares at the strike price at any time up through the option expiration date.
This advanced strategy allows you to collect a premium while minimizing your initial capital investment. The margin requirements for this strategy, however, are often higher. That’s because you have a limited profit (the option premium) and potentially unlimited loss if the stock soars and you’re obligated to buy shares at the market price and sell them at the strike price.
A “naked put” (or “uncovered put”) is a put option trade on a stock you don’t own.
Investors who sell naked put options expect the stock to remain flat or fall lower than the strike price.
If you sell a naked put, you’re obligated to buy another investor’s shares if they reach the strike price by the option expiration date. For this reason, you should only sell puts on a stock you want to own at a strike price you’re willing to pay.
If the stock doesn’t reach the strike price by the option expiration date, you walk away with the premium you received for the contract. If executed properly, selling naked puts allows you to collect extra income while minimizing your capital risk.
Net asset value is the price per share for an ETF or mutual fund. In both cases, the price is calculated by dividing the total value of all the securities in the fund’s portfolio, less any liabilities, by the number of shares outstanding.
A fund is trading above its NAV is said to be at a premium, and one selling below its NAV is at a discount.
An open-ended fund is a mutual fund or ETF that issues as many shares as investors are willing to buy. Most mutual funds are open-end funds. The price you pay for a share of an open-end mutual fund is simply the “net asset value,” or NAV. Unlike closed-end funds, open-end funds always trade at their NAV.
An “option premium” is the price of an option contract quoted as a dollar amount per share. One option contract usually represents a lot of 100 shares. So if the option premium is $1.50, then the option seller receives $150 for each contract.
Options premiums are based on three main factors – the timeframe before expiration, the potential profit value (intrinsic value) and the implied volatility (how frequently a stock price moves up and down). Because of what’s called the time value of money, the further an option is out, the more valuable it is. Also, the more volatile a stock, the more an option is worth because of the likelihood it will reach profitability before expiration.
P/E ratio is an abbreviation for the “price-to-earnings” ratio.
It’s calculated simply by dividing a stock’s price-per-share by earnings-per-share. For example, if a stock trades at $50 per share and earnings over the last year are $2 per share, its P/E ratio would equal 25 ($50/$2).
Because of this simple calculation it’s widely used as a quick indication of a stock’s value relative to the overall market, its industry, similar competitors, etc…
It’s important to note that because the markets are forward-looking, higher expected growth usually correlates with higher P/E multiples. For example, the average P/E of the technology sector is higher than the average P/E of the coal industry.
It typically comes in two varieties – trailing P/E and forward P/E.
A “Pairs Trade” is a trading strategy designed to profit from the increase of one asset’s price along with the simultaneous decrease in another. This is accomplished by “pairing” a long position with a short position.
For example, a trader might believe one company (Company A) will gain a large market share from another company (Company B). In this case, the trader would buy Company A (and bet on it rising) and short Company B (and bet on it falling).
Professional traders frequently place pairs trades in order to profit from their knowledge of specific companies. Pairs trades can profit no matter what the general market is doing.
For example, in 2007 a trader that believed the iPhone would be successful could have bought Apple Inc. and shorted its competitor Nokia. The iPhone took over the world and grabbed a huge amount of market share from former leader Nokia. This trade would have produced profits from being long Apple (which soared)… and being short Nokia (which plummeted).
PEG ratio is an acronym for price/earnings to growth ratio. It’s a valuation metric used to compare the P/E ratio to annual EPS growth.
Companies are considered fair value when their PEG ratio is at 1.0. Values below 1.0 indicate shares are undervalued and values over 1.0 indicate shares are overvalued.
Since P/E ratios for high-growth companies tend to be higher than average, investors can use a PEG ratio as a more accurate gauge on how cheap or expensive a high-growth company is valued.
For example, imagine Company A has a P/E of 35 and a PEG of 0.60 and Company B has a P/E of 10 and a PEG of 2.0. Company A may be the better bargain despite a higher P/E.
The price-to-sales ratio is a ratio used to value companies. It is calculated by dividing a stock’s price by its sales (also called revenue) per share for the trailing 12 months.
For example, if a company produces $3 per share in sales and has a share price of $9, the price-to-sales ratio of the stock is 3 (stock price of $9 divided by $3 in sales per share).
The price-to-sales ratio is useful for comparing two companies in the same industry. Many analysts like it because the “earnings” factor in the “price-to-earnings” ratio can be more easily manipulated by creative accounting than “sales.”
A “put option” is a financial contract that gives you the right (but not the obligation) to sell – or “put” –your shares to another investor at a set price (“strike price”) at any time up through the option’s expiration date (normally market close on the third Friday of the month).
Investors who trade put options expect the stock to fall lower over time.
When you sell a put option, you’re obligated to buy a stock at a later date. This strategy allows you collect an option premium while you wait for a stock to reach your ideal buy price.
If you buy a put option, you’re paying for the right to sell your shares at a later date. This strategy hedges potential losses by allowing you to sell your shares at price that’s higher than market value.
Quantitative Easing, or QE, is the practice of central banks purchasing debt-securities (bonds) with money created out of thin air. This enhances the money supply and therefore inflates the prices of assets. This practice is mainly used when interest rates have already have been moved close to 0% and haven’t had the desired effect of stimulating the economy.
The theory goes that if assets appear more valuable, people will believe they have more money and spend more – stimulating economic growth. Its effectiveness is hotly debated.
REIT is an acronym for “Real Estate Investment Trust.”
REITs are bundles of real estate assets that trade just like stocks. They give shareholders a “one click” way to get exposure to real estate. For example, some REITs own huge amounts of apartment buildings. Some REITs focus on shopping malls. Other types of REITs include those that own office space, timberland, health care facilities, and warehouses.
Like MLPs and royalty trusts, REITs receive special tax treatment from the government. This tax treatment allows REITs to pass along the bulk of their income to shareholders in the form of dividends. Because of this, REITs are popular with income-seeking investors.
A royalty trust is a security that allows investors to earn royalties on natural resources, such as oil fields or coal mines.
Royalty Trusts are a great tool for investors who don’t have the resources to buy their own well or mine. Additionally, since trusts often own numerous individual wells, oil fields, or mines, they’re a convenient way for investors to diversify across numerous properties.
Like REITs and MLPs, royalty trusts receive special tax treatment from the government – allowing them to pass along more income to investors. Additionally, MLP shares are technically known as “units,” and dividends are called “distributions.” This means that income received from trusts are not taxed as dividends or income. Income is usually taxed at the capital gains rate, and not applied until units are sold. However, unlike the relatively steady income streams of REITs and MLPs, royalty trusts are sensitive to fluctuation in the prices of their underlying assets.
A short squeeze is when a heavily shorted stock rises sharply.
As the shares rise, it forces short-sellers to buy more shares to cover their short position – which pushes the stock even higher…
During a short squeeze, a stock can easily jump more than 20% in a single day with little or no fundamental reason.
Small-cap is a term that refers to stocks with a small market capitalization (generally under $5 billion).
One of the biggest advantages small-cap stocks have over large-cap stocks is that mutual funds are limited from buying large portions of these companies – meaning individual investors can get in before Wall Street.
Small-cap companies also have huge growth potential, and can grow more quickly than large-cap stocks. But these companies can also be volatile (daily moves of 5% or more are common), and carry a higher degree of risk compared to more established companies.
The statement of cash flow is a financial statement that provides a summary of all cash inflows and outflows during a given financial period.
The statement of cash flows is one of the “big three” financial statements a publicly-traded company is required to disclose to the public and the SEC. The other two are the balance sheet and the income statement.
A stock option is a special kind of contract that allows two parties to trade the right (but not the obligation) to buy or sell shares of stock at a set price (the “strike price”). It’s essentially a bet that a stock will go up or down in an allotted timeframe (before expiration). These can be used for advanced profit strategies – such as put selling or writing covered calls – or simply for hedging the risk of owning shares, as with a protective put.
The right to buy shares is referred to as a call option and the right to sell shares is a put option. To trade options, you typically must have a margin account with your broker.
A stock split is a term used to describe a proportional increase in the number of a corporation’s outstanding shares. The stock’s market capitalization stays the same.
The most common stock splits are 2-for-1, 3-for-2, and 3-for-1. For example, in a 2-for-1 split, each stockholder receives an additional share for each share held… but the value of each share is cut in half. Most stock splits are initiated after a rise in share price.
A stop-loss is a predetermined point at which you’ll sell a trading position. It can be expressed either as a dollar amount or as a percentage.
Using stop losses is a way to limit trading risk. Knowing when to sell a position is one of the most difficult aspects of trading… So setting a stop-loss in advance takes emotion out of the decision to sell.
One common type of stop loss is a “hard stop,” which is set a certain amount below your purchase price. Another is a “trailing stop,” which is adjusted as the price of an asset moves higher.
Strike price is the price at which option buyers can exercise an option. Strike prices are fixed in the option contract. Call buyers have the right to buy the underlying stock at the strike price, while put buyers have the right to sell the stock at the strike price.
The difference between the underlying stock’s current market price and the option’s strike price is the amount of profit made from exercising the option.
A trailing stop is a stop-loss order that investors use to protect gains and limit big losses. It is set at a defined percentage away from a security’s most recent high. Trailing stops are typically held between 15% and 25%, but it depends on the individual investor.
For example, if you placed a 15% trailing stop on a stock that you purchased at $10 a share, the trailing stop would be triggered if that stock were to decline by 15%. This caps your loss and protects your principal.
This strategy helps you cut your losses early and let your winners run. According to Stansberry Research editor Steve Sjuggerud, trailing stops are “The Best Exit Strategy for Any Investment.”
Volatility is the lack of stability in the price of a stock.
Therefore, it’s a way to measure risk – since the range of outcomes is much less predictable. The standard measure for volatility is “beta.” A beta of 1.0 means the stock moves equal to the broad market. A beta below 1.0 means the stock moves less frequently than the overall market. A beta above 1.0 means the stock moves more frequently than the overall market – and is thus more volatile…
In options trading, volatility is used as a factor in determining the value of an option, since a more volatile stock typically has better odds to make a bigger move in either direction.
Volume is the number of shares traded of a security or an entire market during a specified time. It’s a measure of trading activity and an important indicator in technical analysis. It shows the strength of price moves in the market.
For example, if a stock buyer purchases 50 shares… That means the trading volume for that period increases by 50 shares following that transaction.
“World dominating dividend growers” (WDDGs) is a term coined by Stansberry Research analyst Dan Ferris for an elite class of stocks he believes every investor should own.
These companies dominate their industries with the best brand names and the biggest competitive advantages. They can raise prices to stay ahead of inflation, or use their enormous size to keep costs lower than everyone else in the industry. This makes them one of the safest investments in the world today.
These companies also have consistently strong profit margins, gush free cash flow, and have rock-solid balance sheets. They reward shareholders through large and growing dividends as well as share buybacks. This allows investors to compound their money at high rates over long periods of time. Because of this, World Dominators allow investors to collect income in any type of market.