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COMMON TERMS IN TRADING / INVESTING

Above the Market
An order to buy or sell at a priceset higher than the current market price of the security. Examples of above themarket orders include: a limit order to sell, a stop order to buy, or astop-limit order to buy.This is a strategy that is often used by momentumtraders. For example, a stop order would be placed above the resistance levelto buy. Should the security's price break through the resistance level, theinvestor may be able to participate in the upward trend.

Absolute Breadth Index - ABI
A market indicator used to determine volatility levels in the marketwithout factoring in price direction. It is calculated by taking the absolutevalue of the difference between the number of advancing issues and the numberof declining issues. Typically, large numbers suggest volatility is increasingwhich is likely to cause significant changes in stock prices in the comingweeks.This tool is classified as a breadth indicator because the number ofadvancing/declining values are the only values used to create it. This indexcan be calculated using any exchange, or a subset of an exchange.

Active Investing
An investment strategy involving ongoing buying and selling actions by theinvestor. Active investors purchase investments and continuously monitor theiractivity in order to exploit profitable conditions. Active investing is highlyinvolved. Unlike passive investors, who invest in a stock when they believe inits potential for long-term appreciation, active investors will typically lookat the price movements of their stocks many times a day. Typically, activeinvestors are seeking short-term profits.

Adding To A Loser
The action of a trader/investorincreasing a position in an asset when its price is heading in the directionthat's opposite to what the investor/trader desires. This is generally not awise investment decision because unless the asset begins to move in the desireddirection, the investor's losses will increase.An investor might add to alosing position instead of closing it because he or she gets emotionallyattached to the asset and has a hard time accepting that it was a badinvestment. Once the trade moves substantially in the wrong direction, however,it may be time to consider closing out or re-evaluating the reason for havingthe position rather than putting more money at risk.

Advance/Decline Index
A technical analysis tool that represents the total difference between thenumber of advancing and declining security prices. This index is considered oneof the best indicators of market movements as a whole. In general, risingvalues of the advance/decline can be used to confirm the likelihood that anupward trend will continue. If the market is up but there are more decliningissues than advancing ones, it's usually a sign that the market is losing itsbreadth and may be getting ready to change direction.

Accounting Noise
The effect of complex and extensive accounting rules that regulatefinancial statement reporting and are thought to distort a company's trueoperating performance.Accounting noise can be seen as either a consequence ofnecessary rules regarding generally accepted accounting principles or a resultof management's attempts to massage the numbers to present a rosier financialpicture of the firm.For example, a company that has recently undergone asignificant merger may look very unprofitable on the income statement; becausethe merger may cause serious one-time charges for the company, it may be usefulfor investors to cut through the accounting noise to get a more accuratepicture of the company's prospects. Conversely, an underperforming companycould engage in earnings manipulation, creating accounting noise to hide itspoor performance.

Air Pocket Stock
When the price of a stock plunges unexpectedly, similar to an airplane whenit hits an air pocket.This is almost always caused by shareholders sellingbecause of unexpected bad news.

Arbitrageur
A type of investor who attempts to profit from price inefficiencies in themarket by making simultaneous trades that offset each other and capturerisk-free profits. An arbitrageur would, for example, seek out pricediscrepancies between stocks listed on more than one exchange, buy theundervalued shares on the one exchange while short selling the same number ofovervalued shares on the other exchange, thus capturing risk-free profits asthe prices on the two exchanges converge. Arbitrageurs are typically very experiencedinvestors since arbitrage opportunities are difficult to find and requirerelatively fast trading. Arbitrageurs also play an important role in theoperation of capital markets, as their efforts in exploiting priceinefficiencies keep prices more accurate than they otherwise would be.

Asset Play
An incorrectly valued stock that is attractive because its combined assetvalue is greater than its market capitalization.
This type of stock is called an asset play because the impetus for purchase isthe fact that the company's assets are being offered to the market relativelycheap. Typically, investors involved in an asset play will buy these stocks inhopes that there will be price corrections causing the market capitalization toincrease and thus lead to a capital gain.

Breakout
A price movement through an identified level of support or resistance,which is usually followed by heavy volume and increased volatility. Traderswill buy the underlying asset when the price breaks above a level of resistanceand sell when it breaks below support. In practice, a breakout is most commonlyused to refer to a situation where the price breaks above a level of resistanceand heads higher, rather than breaking below a level of support and headinglower. Once a resistance level is broken, it is regarded as the next level ofsupport when the asset experiences a pullback  Most traders use chartpatterns and other technical tools such as trendlines to identify possiblecandidates that are likely to break through a support/resistance level.

Bottom Fisher
An investor who looks for bargains among stocks whose prices have recentlydropped dramatically. The investor believes that the recent price drop istemporary and a recovery is soon to follow.A bottom fisher attempts to findstocks that the market has undervalued. Unfortunately, it's difficult to tellthe difference between a bargain and a stock that has fallen for a fundamentalreason.

Bubble
An economic cycle characterized by rapid expansion followed by acontraction.A surge in equity prices, often more than warranted by thefundamentals and usually in a particular sector, followed by a drastic drop inprices as a massive selloff occurs.A theory that security prices rise abovetheir true value and will continue to do so until prices go into freefall andthe bubble bursts.Bubbles form in economies, securities, stock markets andbusiness sectors because of a change in the way players conduct business. Thiscan be a real change, as occurred in the bubble economy of Japan in the 1980swhen banks were partially deregulated, or a paradigm shift, as happened duringthe dotcom boom in the late '90s and early 2000s. During the boom people boughttech stocks at high prices, believing they could sell them at a higher priceuntil confidence was lost and a large market correction, or crash,occurs.    Bubbles in equities markets and economies causeresources to be transferred to areas of rapid growth. At the end of a bubble,resources are moved again, causing prices to deflate. Thus, there is littlelong-term return on those assets.

Bucketing
A situation where, in an attempt tomake a short-term profit, a broker confirms an order to a client withoutactually executing it. A brokerage which engages in unscrupulous activities,such as bucketing, is often referred to as a bucket shop.If the eventual pricethat the order is executed at is higher than the price available when the orderwas submitted, the customer simply pays the higher price. On the other hand, ifthe execution price is lower than the price available when the order wassubmitted, the customer pays the higher price and the brokerage firm pocketsthe difference.

Contrarian
An investment style that goes against prevailing market trends by buying assetsthat are performing poorly and then selling when they perform well.A contrarianinvestor believes that the people who say the market is going up do so onlywhen they are fully invested and have no further purchasing power. At thispoint, the market is at a peak. On the other hand, when people predict adownturn, they have already sold out, at which point the market can only goup.Contrarian investing also emphasizes out-of-favor securities with low P/Eratios. 

Correction
A reverse movement, usually negative, of at least 10% in a stock, bond,commodity or index. Corrections are generally temporary price declines,interrupting an uptrend in the market or asset.A healthy market will correctfrom time to time.

Carbon Trade
An idea presented in response to the Kyoto Protocol that involves the tradingof greenhouse gas (GHG) emission rights between nations.For example, if CountryA exceeds its capacity of GHG and Country B has a surplus of capacity, amonetary agreement could be made that would see Country A pay Country B for theright to use its surplus capacity. The Kyoto Protocol presents nations with thechallenge of reducing greenhouse gases and storing more carbon. A nation thatfinds it hard to meet its target of reducing GHG could pay another nation toreduce emissions by an appropriate quantity. 

Capitulation
A military term. Capitulation refers to surrendering or giving up. In the stockmarket, capitulation is associated with "giving up" any previousgains in stock price as investors sell equities in an effort to get out of themarket and into less risky investments. True capitulation involves extremelyhigh volume and sharp declines. It usually is indicated by panic selling.Aftercapitulation selling, it is thought that there are great bargains to be had.The belief is that everyone who wants to get out of a stock, for any reason(including forced selling due to margin calls), has sold. The price shouldthen, theoretically, reverse or bounce off the lows. In other words, someinvestors believe that true capitulation is the sign of a bottom.

Catalyst
Something that initiates or causes an important event to happen. Originally aterm used in chemistry for the volatile (active) chemical in a formula.Quiteoften you will hear someone say that a stock needs a catalyst. This means thatthe stock needs some good news or a press release to get people interested inthe stock again.

Caveat Emptor
Another way to say, "let the buyer beware."In other words, consumersneed to know their rights and be vigilant in avoiding scams.

Chasing the Market
Entering or exiting of a trend after the trend has already been wellestablished. Investors are often unaware of the fact that they are chasing themarket which can dent the value of a portfolio. This type of investing is oftenseen as irrational as decisions are often based on emotion instead of carefulanalysis of the value of the investment.Chasing the market refers to both theentering into highly priced positions after they have rapidly increased andbecome overvalued as well as the exiting of positions after they have rapidlydecreased and become undervalued. During the internet bubble some investorsentered the rapidly appreciating sector well after the trend had beenestablished and lost considerable sums when the bubble bust.

Circular Trading
A fraudulent trading scheme where sell orders are entered by a broker who knowsthat offsetting buy orders, the same number of shares at the same time and atthe same price, either have been or will be entered.These trades do notrepresent a real change in the beneficial ownership of the security.

Coattail Investing
An investment strategy where investors mimic the trades of well-known andhistorically successful investors. This copycat investing can be very good -why not follow the best?  This investing strategy works the best when themoney manager or institution being mimicked buys companies with a buy and holdmentality.  If the manager is buying the company for a short period oftime, the delay between the purchase and the release of the information to thepublic may render the particular purchase a bad one. However, many moneymanagers buy companies with a buy and hold mindset, including the mostsuccessful one of all, Warren Buffett.

Coiled Market
A market that is believed to have the potential to make a strong move in onedirection after being pushed in the opposite direction. The idea is that if amarket should be headed in one direction based on its fundamentals but ispushed in the other direction, it will eventually make a strong move in the originalfundamental direction. This coiled move will often be more substantial thanwhat might have been the case if it had gone in the expected direction to beginwith.Coiled markets often arise when the market has been held downartificially. This happens in commodities markets, such as gold and silver.Investors looking to capitalize on coiled markets will use both fundamental andtechnical analysis to identify markets or specific equities that exhibit thecharacteristics of a coiled market. The origins of this term relate to thephysics of a coiled spring: the more it is compressed, the greater the reboundwill be.

Corner A Market
To acquire enough shares of a particular security in order to manipulate itsprice. This is why people with significant interest in a particular stock arewatched very closely by the Securities and Exchange Commission.

Cover
Cover is a general term used in many different instances. For instance, aninvestors that recently puchased a security will have to cover the puchase bydepositing the necessary funds. Or, an investor may wish to cover his/her shortposition by purchasing the stock. Or, a portfolio manager may wish to coverhis/her risk exposure by buying an offsetting position.

Dead Cat Bounce
A temporary recovery from a prolonged decline or bear market, after which themarket continues to fall.Ever heard the saying, "Even a dead cat willbounce if dropped from high enough!"?

Dalal Street
A term that refers to the Bombay Stock Exchange, the major stock exchange inIndia. The street is home not only the Bombay Stock Exchange but also a largenumber of other financial institutions.The term "Dalal Street" isused in the same way as "Wall Street" in the U.S., referring to thecountry's major stock exchanges and overall financial system. These terms areoften seen in the financial media.

Ex-Dividend
The trading of shares when a declared dividend belongs to the seller ratherthan the buyer.A stock trades ex-dividend on or after the ex-dividend date(ex-date).

Ex-Rights
Shares of stock that are trading but no longer have rights attached becausethey have either expired, been transferred to another investor or beenexercised. The rights originally assigned to the stockholder are, for whateverreason, no longer valid or no longer applicable to the stock.Ex-rights sharesare worth less than shares which are not yet ex-rights - the ex-rights sharesdo not give a shareholder access to a rights offering. Renounceable rights maytrade separately, allowing shareholders to choose to sell their rights ratherthan exercise them.

Eat Well, Sleep Well
An adage that, referring to the risk/return trade-off, says that the type ofsecurity an investor chooses depends on whether he or she wants to eat well orsleep well.Investing in high-risk, high-reward securities will offer you thepotential to eat well, but the risky nature of these securities might preventyou from sleeping at night. By contrast, investing safely means that you willsleep well, but the low rate of return may keep you from eating well.

Eat Your Own Dog Food
An expression describing the act of a company using its own products forday-to-day operations. A company that eats its own dog food sends the messagethat it considers its own products the best on the market.This slang waspopularized during the dotcom craze when some companies did not use their ownproducts and thus could "not even eat their own dog food". An examplewould've been a software company that created operating systems but used itscompetitor's software on its corporate computers.

Gap
A break between prices on a chart that occurs when the price of a stock makes asharp move up or down with no trading occurring in between. Gaps can be createdby factors such as regular buying or selling pressure, earnings announcements,a change in an analyst's outlook or any other type of news release.

Haircut
1. The difference between prices at which a market maker can buy and sell asecurity.
2. The percentage by which an asset's market value is reduced for the purposeof calculating capital requirement, margin and collateral levels.
3. The term haircut comes from the fact that market makers can trade at such athin spread.
4. When they are used as collateral, securities will generally be devaluedsince a cushion is required by the lending parties in case the market valuefalls.

Initial Margin
The percentage of the purchase price of securities (that can be purchased onmargin) that the investor must pay for with his or her own cash or marginablesecurities. Also called the "initital margin requirement". Forfutures contracts, initial margin requirements are set by the exchange.

Margin Account
A brokerage account in which the broker lends the customer cash to purchasesecurities. The loan in the account is collateralized by the securities andcash. If the value of the stock drops sufficiently, the account holder will berequired to deposit more cash or sell a portion of the stock. In a marginaccount, you are investing with your broker's money. By using leverage in sucha way, you magnify both gains and losses.

Margin Call
A broker's demand on an investor using margin to deposit additional money orsecurities so that the margin account is brought up to the minimum maintenancemargin. You would receive a margin call from a broker if one or more of thesecurities you had bought (with borrowed money) decreased in value past acertain point. You would be forced either to deposit more money in the accountor to sell off some of your assets.

Naked Position
A securities position that is not hedged from market risk. Both the potentialgain and the potential risk are greater when a position is naked instead ofcovered (a covered position is hedged from market risk).If an investor simplyholds 500 shares of SBI, he or she has a naked position in SBI. If the investorwanted to cover this position, he or she could buy put option contracts, whichwould help protect against downward movements in the price of SBIshares.Whether to have a naked position is rarely a concern for most small investors,but it is a concern for large investment holders and institutions.

Oversold
A condition in which the price of an underlying asset has fallen sharply, andto a level below which its true value resides. This condition is usually aresult of market overreaction or panic selling. A situation in technicalanalysis where the price of an asset has fallen to such a degree - usually onhigh volume - that an oscillator has reached a lower bound. This is generallyinterpreted as a sign that the price of the asset is becoming undervalued andmay represent a buying opportunity for investors. Assets that have experiencedsharp declines over a brief period of time are often deemed to be oversold.Determining the degree to which an asset is oversold is very subjective andcould easily differ between investors.Identifying areas where the price of anunderlying asset has been unjustifiably pushed to extremely low levels is themain goal of many technical indicators such as the relative strength index, thestochastic oscillator, the moving average convergence divergence and the moneyflow index.

Overstay
The act of holding an investment for too long. It often occurs when tradersattempt to time the market by identifying the end of a price trend and thebeginning of a new one, but, due to greed and fear, tend to overstay theirpositions. This usually results in reduced gains or, worse, furtherlosses.Knowing when to sell or get out of an investment is just as important asknowing when to get in. However, timing the market correctly is a task thateven professional investors and traders find difficult to accomplish on aconsistent basis, so attempting market timing is not recommended for theaverage investor.

Panic Buying
High volume buying brought about by sharp price increases.The main problem withpanic buying is that investors are not evaluating fundamentals. Instead, theyare blindly buying before prices rise even more.

Pivot
A price level established as being significant either by the market's failureto penetrate it or when a sudden increase in volume accompanies the movethrough the price level.A technical indicator, the pivot price is similar toresistance or support levels. If the price is exceeded, a breakout is expectedto occur.

Price Tension
The phenomenon by which the seller of a particular good, service, or securitydesires to maximize the selling price, while the buyer desires to minimize thepurchasing price. Generally speaking, the greater the price tension within aparticular market, the greater the bid-ask spread.Price tension tends todecrease liquidity and create price stickiness. If price tension is relativelylarge within a particular market or exchange, there will be larger bid-askspreads. Sellers will be asking for more than what the vast majority of buyersare willing to pay, which will drastically reduce the number of exchanges madewithin the market. Having little liquidity in a given market exposes theinvestor to liquidity risk, which can result in drastic changes in thesecurity's underlying value.

Panic Selling
Wide-scale selling of an investment, causing a sharp decline in price. In mostinstances of panic selling, investors just want to get out of the investment,with little regard for the price at which they sell.The main problem with panicselling is that investors are selling in reaction to pure emotion and fear,rather than evaluating fundamentals. Almost every market crash is a result ofpanic selling. Most major stock exchanges use trading curbs and halts to limitpanic selling, to allow people to digest any information on why the selling isoccurring, and to restore some degree of normalcy to the market.

Pump And Dump
A scheme attempting to boost the price of a stock through recommendations basedon false, misleading, or greatly exaggerated statements. The perpetrators ofthis scheme, who already have an established position in the company's stock,sell their position after the hype has led to a higher share price. Thispractice is illegal based on securities law and can lead to heavy fines. Thevictims of this scheme will often lose a considerable amount of theirinvestment as the stock often falls back down after the process iscomplete.  Traditionally, this type of scheme was done through thecold-calling of individuals but with the advent of the internet this illegalpractice has become even more prevalent. Pump and dump schemes usually targetmicro- and small-cap stocks, as they are the easiest to manipulate. Due to thesmall float of these types of stocks it does not take a lot of new buyers topush a stock higher.  Claims being made about how a stock is set to breakout based on the next greatest thing or generate returns of hundreds orthousands of percent, should be met with a considerable amount of caution. Itis important to always do your own research in a stock before making aninvestment.

Profit Taking
The action of selling stock to cash in on a sharp rise. This action pushesprices down temporarily. When traders are profit taking, the implication isthat there is an upward trend in the security.For example, in the media youmight hear something like this: "Markets were down today as traders tooksome profits off the table." It's common for prices to retract to someextent even in bull markets.

unter
A trader who hopes to make quick profits. Basically, another term for"speculator". A punter's approach is to speculate rather than invest.Thus, punters aren't concerned with the fundamentals of an investment; instead,they attempt to make a quick profit by selling to somebody else at a higherprice. Punters speculate in any market, but especially like options, futuresand forex because of the leverage.

Pyramiding
A method of increasing a position size by using unrealized profits fromsuccessful trades to increase margin.An investor who is pyramiding uses excessmargin from the increasing price of a security in his or her portfolio topurchase more of the same security. This is generally a slow method ofincreasing one's position size as the margin increases will permit successivelysmaller purchases.

Selling Into Strength
A proactive trading strategy carried out by selling out of a long or into ashort position when the price of the asset being traded is still rising but isexpected to reverse in price. Opposite of "buying into weakness". Forexample, say a trader believes ABB stock will rise above Rs 15.00 but expectsit to reverse at Rs 15.75. If the trader buys ABB stock at Rs 5.00 and sellswhen the price hits a predetermined exit price of Rs 5.50, that trader would beselling into strength. Conversely, a short seller may sell into a rising pricewith the anticipation that the stock price will soon decline. Many traders willwait for confirmation of a change in price movement before reacting. However,by the time a reversal is confirmed, it may be too late and the trader may endup losing. Thus, by trading against the prevailing trend in the anticipationthat it will soon reverse, the trader allows him- or herself a greater marginof safety. As the saying goes, "missed money is better than lostmoney"

Short Squeeze
A situation in which a lack of supply and an excess demand for a traded stockforces the price upward.Short squeezes occur more often in smaller cap stockswith small floats. If a stock starts to rise rapidly, the trend may continue toescalate because the short sellers will likely want out. For example, say astock rises 15% in one day, those with short positions may be forced toliquidate and cover their position by purchasing the stock. If enough shortsellers buy back the stock, the price is pushed even higher.

Sterile Investment
An investment that does not provide dividends or interest to the investor. In asterile investment, the return is generated completely by capital gains.  Investing in gold or silver is a good example of a sterile investment.

Sideways Market
A situation in which stock price changes little over a period of time.Consequently, traders who follow trends when making their investment decisionswill tend to perform poorly during a sideways market.Also known as"horizontal price movement" or "flat market."

T+1 (T+2,T+3)
Abbreviations that refer to the settlement date of security transactions. The Tstands for transaction date, which is the day the transaction takes place. Thenumbers 1, 2 or 3 denote how many days after the transaction date thesettlement or the transfer of  money and security ownership takes place.For determining the settlement date the only days that are counted are those onwhich the stock market is open. T+1 means that if a transaction occurs on aMonday, settlement must occur by Tuesday. Likewise, T+3 means that atransaction occurring on a Monday must be settled by Thursday, assuming noholidays occur between these days. But if you sell a security with a T+3settlement date on a Friday, ownership and money transfer does not have to takeplace until the following Wednesday. Do not, however, think of the periodbetween transaction and settlement as a flex time in which you can back out ofthe deal. The deal is done on the transaction day--it's just the transfer thatdoes not take place until later. Currently we ae in T+2 settlement.

Tape Is Late
A situation on the trading floor where trading volume is so heavy that thereal-time ticker quotes are delayed by a minute or two. When the tape is latesome price or volume digits will be deleted.The term comes from years ago whenthe "tape" was actually paper and the printer couldn't keep up withtrading activity. In the modern stock market this isn't as much of an issue becausedata is generally delivered electronically.

Tip from a Dip
Advice from a person who claims to have inside information, such assubstantially higher than expected earnings or government approval of corporatemergers, that will materially impact a stock's price but actuallydoesn't.Sometimes referred to as a "tipster" or "tipper",these personalities should be avoided at all costs.  Governmentregulations prevent persons with material insider information, such ascorporate executives and board members, from disclosing their knowledge tofamily members, friends, or other persons for the purpose of profiting offvirtually guaranteed changes in a stock's price once the news hits the street;anyone with decent insider information is effectively prevented from profitingfrom it on the open market

Weekend Effect
A common occurrence in which stock prices tend to be negative Friday throughMonday.Simply put, this is the tendency of stock prices to fall over theweekend

Widow-and-Orphan Stock
Relatively low-risk stocks from well-known firms that pay highdividends.Widow-and-Orphan stocks are generally chosen during bear markets andignored during bull markets. This is because these companies are perceived tobe able to maintain their dividend payment schedule through difficult financialtimes.