5-Step Investing Formula

Online Course Manual

Glossary

11
Section 11 of 11

www.investools.com
2005 INVESTools Inc. All rights reserved.

THE 5-STEP INVESTING FORMULA

Glossary

www.investools.com

Course Overview

INTRODUCTION
SECTION 1 Getting Started
Logging into the INVESTools Investor Toolbox
Support Links
Workshop Review
Account Information
Subscription Renewal
Technical Support
Contact an Instructor
SECTION 2 Introduction to Investing
Tolerance for Risk
Setting Goals
Asset Allocation
Tax Exposure
Brokerage Firms
Introduction to the 5-Step Investing Formula
THE 5-STEP INVESTING FORMULA
SECTION 3 Step 1: Searching for Stocks
Using a Prebuilt Search
Navigating the List of Stocks
SECTION 4 Step 2: Industry Group Analysis
Top-Down Analysis
Big Chart
AutoAnalyzing All Stocks in a Group
Best & Worst Industries List
SECTION 5 Step 3: Fundamental Analysis
Phase 1
Phase 2
Price Pattern
Volatility
Zacks Report
Market Guide
News
AutoAnalyzer

SECTION 6 Step 4: Technical Analysis

Technical Indicators
Moving Averages
MACD
Stochastics
Volume
Support & Resistance
Buy Signals
Money Management
Sell Stop Orders
How Many Shares to Buy
Sell Signals
Insider Trading
SECTION 7 Step 5: Portfolio Management
Creating a Portfolio
Managing Your Portfolio
Paper Trading Account
BONUS SECTION
SECTION 8 Bonus Topics
TurboSearch
Index Tracking Stocks / Exchange-Traded Funds
Dow Jones Industrial Average
The Diamonds (DIA)
S&P 500The Spider (SPY)
NASDAQThe Qs (QQQQ)
SECTION 9 Introduction to Options
Advantages/Risks of Options
Leverage
Call Options
Put Options
Covered Calls
SECTION 10 Appendix
Phase 2 Stock Scoring Form
Phase 2 Quick List for Zacks Report and
Market Guide
Investment Tracking Record
SECTION 11 Glossary

2005 INVESTools Inc. All rights reserved.

page 2 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

A
Accrued Interest
Applying mainly to convertible securities, interest that has accumulated between the most recent payment and the sale of a
bond or other fixed-income security.
Acquisition
When one firm buys another firm.
Active Account
Refers to a brokerage account in which many transactions occur. Brokerage firms may charge a fee for an account that does not
generate an adequate level of activity.
American Stock Exchange (AMEX)
Located in downtown Manhattan, it mostly consists of index options (computer technology index, institutional index, major
market index) and shares of small to medium-sized companies.
Analyst
An employee of a brokerage, fund management house, or other financial institution who studies companies and makes buyand-sell recommendations on stocks of those companies. Most analysts specialize in a specific industry.
Announcement Date
The date on which particular news concerning a given company is announced to the public.
Annual Percentage Rage (APR)
The periodic rate times the number of periods in a year. (Example: a 5% quarterly return has an A.P.R. of 20%.)
Ask Price
This is the lowest price an investor will accept to sell a stock. In other words, this is the quoted offer at which an investor can
buy shares of stock; also called the offer price.
Asset
Any possession that has value in an exchange.
At-the-Money
An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.
Authorized Shares
Number of shares authorized for issuance by a firms corporate charter.

B
Basis
In simple terms, your cost of the asset. If you pay $10/share for a stock and $1/share commission, your basis is $11/share.
Bear
An investor who believes a stock or the overall market will decline.
Bearish
Refers to the attitude of an investor as being pessimistic; a pessimistic outlook.

2005 INVESTools Inc. All rights reserved.

page 3 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Bear Market
Any market in which prices exhibit a declining trend for a prolonged period, usually falling by 20% or more.
Bid / Bid Price
The highest price an investor is willing to pay to buy a security.
Bid-Ask Spread
The difference between what buyers are willing to pay and what sellers are asking for in terms of price.
Black Monday
Refers to October 19, 1987, when the Dow Jones Industrial Average fell 508 points after sharp drops the previous week.
Blue-Chip Company
Used in the context of general equities, a large and creditworthy company; a company renowned for the quality and wide
acceptance of its products/services, and for its ability to make money and pay dividends.
Bond
Debt issued for a period of more than one year. When investors buy bonds, they are lending money; the seller of the bond
agrees to repay the principal amount of the loan at a specified time.
Breakout
A rise in price of the security above a resistance level (commonly its previous high price) or a drop below a level of support
(commonly the former lowest price.) It can be used as a buy or sell indicator.
Broker
An individual who is paid a commission for executing customer orders; an agent specializing in stocks, bonds, commodities, or
options, and must be registered with the exchange where the securities are traded.
Bull
An investor who thinks the market will rise.
Bull Market
Any market in which prices are in an upward trend.
Bullish
Refers to the attitude of an investor as being optimistic; an optimistic outlook.
Buy
To purchase an asset.
Buy-and-Hold
A passive investment strategy with no active buying and selling of stocks. A long position.
Buy Limit Order
A conditional trading order that indicates a security may be purchased only at the designated price or lower.
Buy on Margin
Borrowing to buy additional shares, using the shares as the collateral.
Buy Order
An order to a broker to purchase a specific quantity of a security.

2005 INVESTools Inc. All rights reserved.

page 4 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Buy Stop Order

An order to buy that is not to be executed until the market price rises to the stop price. Once the security breaks through that
price, the order is then treated as a market order.
Buyers Market
A market in which the supply exceeds the demand, creating lower prices.

C
Calendar Spread
Applying to derivative products, a strategy in which there is a simultaneous purchase and sale of options of the same class at
different strike prices, but with the same expiration date.
Call
An option contract that gives the holder the right, but not the obligation, to buy a specified number of shares of the underlying
stock at the given strike price on or before the expiration date of the contract.
Called Away
When a call or put option is exercised against the stockholder.
Capital
Money invested in a firm.
Capital Gain
When a stock is sold for a profit, the difference between the net sales price of the securities and their net cost.
Capital Loss
When a stock is sold below cost; the difference between the net cost of a security and the net sales price, if the security is sold
at a loss.
Cash Commodity
The actual physical commodity, as distinguished from a futures contract.
Cash Flow
Represents earnings before depreciation, amortization, and non-cash charges; sometimes called cash earnings. This indicates
the ability to pay dividends.
Ceiling
The highest price, interest rate, or other numerical factor allowable in a financial transaction.
Close
The period at the end of the trading session; sometimes used to refer to the closing price.
Closing Price
The price of the last transaction of a particular stock completed during a days trading session on an exchange.
Closing Quote
The last bid and offer prices of a particular stock at the close of a days trading session on an exchange.

2005 INVESTools Inc. All rights reserved.

page 5 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Collar
An upper and lower limit on the interest rate on a floating-rate note or an adjustable-rate mortgage.
Collateral
An asset than can be repossessed if a borrower defaults.
Combination Strategy
A strategy in which a put and call with the same strike price and expiration are either both bought or both sold.
Commission
The fee paid to a broker to execute a trade, which is based on the number of shares, bonds, options, and/or their dollar value.
Commission Broker
A broker on the floor of an exchange who acts as the agent for a particular brokerage house buying and selling stocks on a
commission basis.
Commodity
A fixed physical substance that investors buy or sell, usually via futures contracts.
Common Units or Shares
Traditionally, units of ownership that do not give guaranteed payments or dividends to their owners, and are usually limited
in their voting power. In return for accepting these restrictions, owners of common units normally receive all growth over the
amount paid to preferred unit-holders.
Contract
A unit of trading for a financial or commodity future; the actual bilateral agreement between the buyer and seller of a
transaction as defined by an exchange.
Cover
The purchase of a contract to offset a previously established short position.
Covered Call
A short call option position in which the writer owns the number of shares of the underlying stock represented by the option
contracts. These generally limit the risk the writer takes because the stock does not have to be bought at the market price if the
holder of the option decides to exercise it.
Covered Option
A position offset by an equal and opposite position in the underlying security.
Covered Put
A put option position in which the option buyer is also short the corresponding stock or has deposited cash or cash equivalents
equal to exercising the option. This limits the buyers risk because money or stock is already set aside. In the event the holder
of the put option decides to exercise the option, the buyers risk is more limited than with an uncovered or naked put option.

D
Daily Price Limit
The level at which many commodity, futures, and options markets are allowed to rise or fall in a day. Exchanges usually
impose a daily price limit on each contract.

2005 INVESTools Inc. All rights reserved.

page 6 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Day Order
Referring to general equities, a request to either buy or sell stock that, if not cancelled or executed the day it is placed, expires
automatically. All orders are day orders unless otherwise specified.
Day Trading
Establishing and liquidating the same position or positions within one days trading.
Delayed Quote
A stock or bond quote that shows the bid and ask prices 15, sometimes 20 minutes after a trade takes place.
Depressed Market
Market in which supply overwhelms demand, leading to weak and lower prices.
Discount Broker
A brokerage house featuring relatively low commission rates in comparison to a full-service broker.
Diversification
Dividing investments among a variety of securities with different risks, rewards, and correlations in order to minimize risk.
Dividend
A portion of a companys profit paid to common and preferred shareholders.
Domestic Market
A nations internal market for issuing and trading securities of entities domiciled within that nation.
Dow Jones Industrial Average (Dow)
The best known U.S. index of stocks. A price-weighted average consisting of 30 actively traded blue-chip stocks, primarily
industrial, including stocks traded on the New York Stock Exchange. It is also a barometer of how shares of the largest U.S.
companies are performing.
Downtick
A downward price movement in a particular stock. A trade occurring at a lower price than the previous sale.
Downturn
The transition point between a rising, expanding economy to a falling, contracting one.

E
Earned Income
Income that is paid as a salary from a job or passed through from a schedule C or a partnership that you materially participated
in and had the power to contract for. This type of income is subject to employment taxes.
Earnings
Net income for a company during a period.
Earnings Surprises
Positive or negative differences from the consensus forecast of earnings by institutions.
Employee Stock Fund
A firm-sponsored program that enables employees to purchase shares of the firms common stock on a preferential basis.

2005 INVESTools Inc. All rights reserved.

page 7 of 28

THE 5-STEP INVESTING FORMULA

Glossary

www.investools.com

Exercise
To implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying
security.
Exercise Price
The price at which the security underlying a future or options contract may be bought or sold.
Expiration
The time an option contract lapses.
Expiration Date
The last day on which an option may be exercised. For stock options, this date is the third Friday of the expiration month.
Extension Date
The day on which the first option either expires or is extended.

F
Financial Adviser
A professional who offers financial advice to clients for a fee and/or commission.
Financial Analysis
An analysis of a companys financial statement, often done by financial analysts.
Financial Analyst
A professional who analyzes financial statements, interviews corporate executives, and attends trade shows of companies in
order to write reports recommending either purchasing, selling, or holding various stocks. Also called securities analyst and
investment analyst.
Flexible Mutual Fund
A fund that invests in a variety of securities in varying proportions in order to maximize shareholder returns while maintaining
a low level of risk.
Fluctuation
A price or interest rate change.
Forecasting
Making projections about the future performance of a stock on the basis of historical and current conditions data.
Full-Service Broker
A broker who provides clients an all-inclusive selection of services, such as advice on security selection and financial planning.
Fully Invested
Used to describe an investor whose assets are totally committed to investments, typically stock.
Fund Manager
The person responsible for the allocation of pooled money invested in a particular mutual fund. He/she is charged with
investing the money to attain the returns and level of risk of the mutual fund investors.

2005 INVESTools Inc. All rights reserved.

page 8 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Fundamental Analysis
Security analysis that seeks to detect mis-valued securities through an analysis of a firms business prospects, focusing on
earnings, dividend prospects, expectations for future interest rates, and risk evaluation of the firm.
Futures
A term used to designate all contracts covering the sale of financial instruments or physical commodities for future delivery on
a commodity exchange.
Futures Contract
An agreement to buy or sell a set number of shares of a specific stock in a designated future month at a price agreed upon
today by the buyer and seller. The contract is often traded on the futures market. A futures contract differs from an option as an
option is the right to buy or sell, while a futures contract is the promise to actually make a transaction.
Futures Option
An option on a futures contract.

G
Gain
A profit on a securities transaction recognized by selling a security for more than the security originally cost. The gain is the
difference between the buy price and the sale price.
Gross Profit
Sales minus the cost of the goods sold.
Gross Profit Margin
The gross profit divided by sales, which is equal to each sales dollar left over after paying for the cost of goods sold.
Growth Opportunity
Opportunity to invest in profitable projects.

H
Hedge
A transaction that reduces the risk of an investment.
Hedging
A strategy designed to reduce investment risk using call options, put options, short-selling, or futures contracts. Its purpose is to
reduce the volatility of a portfolio by reducing the risk of loss; it can help lock in profits.
Held Order
An order that must be executed without hesitation or if the stock can be bought or sold at that price in sufficient quantity.
High-Tech Stock
Stocks of companies operating in high-technology fields.
Hold
1) To maintain ownership of a security over a long period of time.
2) The recommendation of an analyst who is not positive enough on a stock to recommend a buy, but not negative enough on
the stock to recommend a sell.
2005 INVESTools Inc. All rights reserved.

page 9 of 28

THE 5-STEP INVESTING FORMULA

Glossary

www.investools.com

I
IRA (Individual Retirement Accounts)
Tax deferred accounts individuals can contribute to as long as they have earned income.
In-the-Money
A put option with a strike price higher than the underlying futures price or a call option with a strike price lower than the
underlying futures price.
Index
Statistical composite that measures changes in the economy or in financial markets, often expressed in percentage changes
from a base year or from the previous month. Indexes measure the ups and downs of stocks, bonds, and some commodities
markets in terms of market prices and weighting of companies in the index.
Index Fund
Investment fund designed to match the returns on a stock market index; a mutual fund with a portfolio that matches a broadbased index such as the S&P 500 and a performance mirroring it.
Indicator
Used in the context of general equities, a technical or fundamental measurement used to forecast the markets direction, such as
investment advisory sentiment, stock trading volume, interest rates direction, and corporate insiders buying or selling.
Insider Information
Material information about a company that has not yet been made public.
Insider Trading
Trading by officers, directors, major stockholders, or others who hold private inside information allowing them to benefit from
buying or selling stock.
Insiders
Directors and senior officers of a corporation; those who have access to inside information about a company; someone who
owns more than 10% of the voting shares of a company.
Investment Income
The revenue from a portfolio of invested assets.
Investment Manager
The individual who manages a portfolio of investments; also called a portfolio manager or money manager.
Investment Strategy
A strategy an investor uses when deciding how to allocate capital among several options, including stocks, bonds, cash
equivalents, commodities, and real estate.
Investments
Financial securities, such as stocks and bonds.
Investor
The owner of a financial asset; one who is looking to earn money in the stock market through a buy-and-hold strategy. Most
earnings are either long-term capital gains, dividends, or interest.

2005 INVESTools Inc. All rights reserved.

page 10 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

K
Keogh Plan
A type of pension account in which taxes are deferred. Available to those who are self-employed.

L
Lapsed Option
An option that no longer has any value because it was not exercised before or on its expiration date.
Large-Cap Stock
A stock with a high level of capitalization, usually at least $5 billion market value.
Leader
A stock or group of stocks first to move in a market upsurge or downturn.
LEAPS (Long-term Equity Anticipation Securities)
Long-term options.
Leverage
The rising or falling at a proportionally greater amount than comparable investments; a given stock price change that may
result in a greater increase or decrease in the value of the option.
Limit Order
An order to buy stock at or below a specified price, or to sell stock at or above a specified price. A conditional trading order
designed to avoid the danger of adverse unexpected price changes.
Listed Stocks
Stocks traded on an exchange.
Long Straddle
Taking a long position in both a put and a call option.
Long Term
In accounting terms, one year or longer.
Long-term Capital Gains
Gains from the purchase or sale of capital assets that are held for longer than 12 months.
Long-term Investor
A person who makes investments for a period of at least five years in order to finance his or her long-term goals.
Loss Ratio
The ratio of losses paid or accrued by an insurer to premiums collected over a year.

M
Majority Shareholder
A shareholder who is part of a group that controls more than half the outstanding shares of a corporation.

2005 INVESTools Inc. All rights reserved.

page 11 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Margin
Allows investors to buy securities by borrowing money from a broker; the difference between the market value of a stock and
the loan a broker makes.
Margin Account
An account that can be leveraged, in which stocks can be purchased for a combination of cash and a loan. The loan is
collateralized by the stock; if the value of the stock drops sufficiently, the owner must either put in more cash or sell a portion
of the stock.
Margin Call
A demand for additional funds because of an adverse price movement.
Market Analysis
An analysis of technical, corporate, and market data used to predict movements in the market.
Market Index
A measure of the market consisting of weighted values of the components that make up a certain list of companies. A tracking
of the performance of certain stocks by weighting them according to their prices and the number of outstanding shares using a
particular formula.
Market Opening
The start of formal trading on an exchange.
Market Order
An order to buy or sell a stated amount of a security at the most advantageous price obtainable after the order is presented in
the trading crowd. Special restrictions cannot be specified (all or none or good till cancelled orders) on market orders.
Market Prices
The amount of money a willing buyer pays to acquire stock.
Market Research
A technical analysis of factors such as volume, price trends, and market breadth that are used to predict price movement.
Market Return
The return on the market portfolio.
Market Risk
Risk that cannot be diversified away.
Market Share
The percentage of total industry sales that a particular company controls.
Market Value
1) The price at which a security is trading and could presumably be purchased or sold.
2) What investors believe a firm is worth, calculated by multiplying the number of shares outstanding by the current market
price of a firms shares.
Mature
To cease to exist; to expire.

2005 INVESTools Inc. All rights reserved.

page 12 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Merger
1) An acquisition in which all assets and liabilities are absorbed by the buyer.
2) Any combination of two companies.
Midcap
A stock with a capitalization of usually between $1 billion and $5 billion.
Momentum
The amount of acceleration in an economic, price, or volume movement.
Money Market Fund
A mutual fund that invests only in short-term securities, such as bankers acceptances, commercial paper, repurchase
agreements, and government bills.
Moving Average
The mean calculated at any time over a past period of fixed length.
Mutual Fund
Pools of money managed by an investment company and regulated by the Investment Company Act of 1940. It offers a variety
of goals, depending on the fund and its investment charter. Some funds seek to generate income on a regular basis, others seek
to preserve an investors money, while others seek to invest in companies growing at a rapid pace.

N
NASDAQ
The National Association of Securities Dealers Automatic Quotation System.
Naked Option Strategies
An unhedged strategy making exclusive use of the short call strategy and short put strategy.
Naked Strategies
Writing an option without owning the underlying asset. The holder is naked because he/she may have agreed to sell something
not owned.
Narrow Market
An inactive market, which displays large fluctuations in prices due to a low volume of trading.
Narrowing the Spread
Reducing the difference between the bid and ask prices of a security.
Nearest Month
The expiration date of an option or future that is closest to the present.
Net
The gain or loss on a security sale as measured by the selling price of a security less the adjusted cost of acquisition.
New York Stock Exchange (NYSE)
The Big Board or the Exchange.

2005 INVESTools Inc. All rights reserved.

page 13 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

NYSE Composite Index

Composite index covering price movements of all new world common stocks listed on the New York Stock Exchange. It
is based on the close of the market on December 31, 1965, at a level of 50.00, and is weighted according to the number of
shares listed for each issue. The composite index is supplemented by separate indexes for four industry groups: industrial,
transportation, utility, and finance.
No-Load Mutual Fund
A mutual fund that does not impose a sales commission; an open-end investment company whose shares are sold without a
sales charge.
Notification Date
The day the option is either exercised or expires.

O
Offer Price
Indicates a willingness to sell at a given price.
Open
In the context of general equities, having either buy or sell interest at the indicated price level and side of a preceding trade.
Open Position
A long or short position whose value will change with a change in prices.
Opening
The beginning of the trading session officially designated by an exchange during which all transactions are considered made
at the opening.
Opening Price
The range of prices at which first bids and offers are made on an exchange.
Option
The right, but not the obligation, to buy or sell an asset at a set price on or before a given date. An option is part of a class of
securities that derive their value from the worth of an underlying investment.
Option Agreement
A form an options investor fills out when opening an option account that guarantees the investor will follow trading regulations
and has the financial resources to settle possible losses.
Option Cycle
The cycle of option expiration months. The most common cycles are: January, April, July, and October (JAJO); February, May,
August, and November (FMAN); and March, June, September, and December (MJSD).
Option Holder
A person who has an option that has not been exercised.
Option Price
The price the buyer of the option contract pays for the right to buy or sell a security at a specified price in the future; also
called option the premium.

2005 INVESTools Inc. All rights reserved.

page 14 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Option Seller
The party who grants the right to trade a security at a given price in the future; also called an option writer.
Option Series
A group of options on the same underlying security with the same exercise price and maturity month.
Options Contract
A contract that, in exchange for the option price, gives the option buyer the right, but not the obligation, to buy (or sell)
a financial asset at the exercise price from (or to) the option seller within a specified time period or on a specified date
(expiration date).
Order
Instruction to a broker/dealer to buy, sell, deliver, or receive securities or commodities that commits the issuer to the terms
specified.
Out-of-the-Money Option
1) With a call option, when the strike price is greater than the market price of the underlying security, giving you the right to
purchase a security at a price higher than the market price, which is not valuable.
2) With a put option, when the strike price is lower than the market price of the underlying security.
Overbought
In the context of general equities, they are too high in price, thus, a technical correction is expected.

P
Paper Gain/Loss
Unrealized capital gain (loss) on securities held in a portfolio based on a comparison of the current market price to the original
cost.
P/E Ratio
The price to earnings ratio; current stock price divided by trailing annual earnings per share or expected annual earnings per
share.
Peak
The high point at the end of an economic expansion until the start of a contraction.
Pension Plan
A fund established for the payment of retirement benefits.
Portfolio Insurance
A strategy using a leveraged portfolio in the underlying stock to create a synthetic put option. The goal is to ensure that the
value of the portfolio does not fall below a certain level.
Portfolio Manager
In the context of general equities, professional responsibility for the securities portfolio of an individual or institutional
investor, such as a mutual fund, pension fund, profit-sharing plan, bank trust department, or insurance company. In return
for a fee, the manager has the fiduciary responsibility to manage the assets prudently and choose which asset types are most
appropriate over time.

2005 INVESTools Inc. All rights reserved.

page 15 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Position
A market commitment; the number of contracts bought or sold for which no offsetting transaction has been entered into. The
buyer of a commodity is said to have a long position, and the seller of a commodity is said to have a short position.
Preferred Shares
Shares that give investors a fixed dividend from the companys earnings and entitle them to be paid before common
shareholders.
Preferred Stock
A security that shows ownership in a corporation and gives the holder a claim, prior to the claim of common stockholders, on
earnings and generally on assets in the event of liquidation. Most preferred stock pays a fixed dividend that is paid prior to the
common stock dividend, stated in a dollar amount or as a percentage of par value.
Premium
1) A bond sold above its par value.
2) The price of an option contract. In futures trading, the amount by which the futures price exceeds the price of the spot
commodity. For options, the option price in the open market or the portion of the price that exceeds parity.
Profit
Revenue earned minus the cost and commission. The amount gained on a transaction.
Profit Forecast
A prediction of future profits of a company that could affect investment decisions.
Profit Margin
An indicator of profitability. The ratio of earnings available to stockholders to net sales. Determined by dividing net income by
revenue for the same 12-month period. Also known as net profit margin.
Profit-Sharing Plan
An incentive system that allows employees to share in company profits through a cash fund or a deferred plan used to buy
stock or bonds.
Profit Taking
Action by short-term securities traders to cash in on gains created by a sharp market rise, which pushes prices down
temporarily but implies an upward market trend.
Public Offering
In the context of general equities, an offering to the investment public, after compliance with registration requirements of the
SEC, usually by an investment banker or a syndicate made up of several investment bankers, at a price agreed upon between
the issuer and the investment bankers.
Public Ownership
The portion of a companys stock that is held by the public.
Publicly Held
Describes a company whose stock is held by the public.
Publicly Traded Assets
Assets that can be traded in a public market, such as the stock market.

2005 INVESTools Inc. All rights reserved.

page 16 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Purchase Order
A written order to buy specified goods at a stipulated price.
Put
An option granting the right to sell the underlying futures contract. This security gives investors the right to sell a fixed number
of shares at a fixed price within a given period.
Put-Call Ratio
The ratio of the volume of put options traded to the volume of call options traded, which is used as an indicator of investor
sentiment (bullish or bearish).
Put Price
The price at which an asset is sold if a put option is exercised.
Put to Seller
To exercise a put option; to require that the option writer purchase the stock at the strike price.

Q
Quarterly
Occurring every three months.
Quoted Price
The price at which the last trade of a particular security or commodity took place.

R
Rally (Recovery)
An upward movement of prices.
Range
The high and low prices or high and low bids and offers recorded during a specified time.
Real Time
A stock or bond quote in real time; a quote that states a securitys most current offer to buy or sell.
Realized Return
The return that is actually earned over a given time period.
Recession
A temporary downturn in economic activity, usually indicated by two consecutive quarters of a falling gross domestic product.
Required Return
The minimum expected return needed in order to purchase an asset/to make the investment.
Resistance Level
A price level above which it is supposedly difficult for a security or market to rise. A price ceiling at which technical analysts
note persistent selling of a commodity or security.

2005 INVESTools Inc. All rights reserved.

page 17 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Return
The change in the value of a portfolio over an evaluation period, including any distributions made from the portfolio during
that period.
Return on Equity (ROE)
An indicator of profitability determined by dividing net income for the past 12 months by common stockholder equity and
shown as a percentage. ROE is used to measure how a company is using its money.
Return on Investment (ROI)
Book income as a proportion of net book value.
Revenue Sharing
The percentage split between the general partner and limited partners of profits and losses resulting from the operation of a
business.
Risk
The risk that the issuer cash flow will not be adequate to meet its financial obligations. Additional risk a firms stockholder
bears when the firm uses debt and equity.
Risk Factor
A set of common factors that impact returns (e.g., market return, interest rates, inflation, or industrial production).
Risk Indexes
Categories of risk used to calculate fundamentals, including 1) market variability, 2) earnings variability, 3) low valuation, 4)
immaturity and smallness, 5) growth orientation, and 6) financial risk.
Risk Management
The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures.
Risky Asset
An asset thats future return is uncertain.
Roth IRA
A type of IRA (Individual Retirement Account) that allows contributors to invest up to $2,000 per year, and for assets to grow
completely tax free, and to withdraw the principal and earnings tax-free under certain conditions. However, the contributor
does not receive an initial tax deduction for making contributions to the IRA.

S
SEC
Securities & Exchange Commission, a federal agency that regulates the U.S. financial markets, as well as oversees the
securities industry and promotes full disclosure in order to protect the investing public against malpractice in the securities
markets.
Sales Forecast
A key input to a firms financial planning process based on historical experience, statistical analysis, and consideration of
various macroeconomic factors.
S&P 500 Composite Index (Standard & Poors Corporation)
An index of 500 widely held common stocks that measures the general performance of the market.

2005 INVESTools Inc. All rights reserved.

page 18 of 28

THE 5-STEP INVESTING FORMULA

Glossary

www.investools.com

Savings Bond
A government bond issued in face value denominations from $50 - $10,000, with local and state tax-free interest and
semiannually adjusted interest rates.
Sector
Used to characterize a group of securities that are similar with respect to maturity, type, rating, industry, and/or coupon.
Security
Stocks and their derivatives.
Securities Markets
Organized exchanges plus over-the-counter markets in which securities are traded.
Sell Limit Order
Conditional trading order that indicates a security may be sold at the designated price or higher.
Sell Off
The sale of securities under pressure.
Sell Order
An order that may take many different forms by an investor to a broker to sell a particular stock, bond, option, future, mutual
fund, or other holding.
Sell Out
1) The liquidation of a margin account after a customer has failed to bring an account to a required level by producing
additional equity after a margin call.
2) The selling of securities by a broker when a customer fails to pay for them.
3) The complete sale of all securities in a new issue.
Sellers Market
A market in which demand exceeds supply. As a result, the seller can dictate the price and the terms of a sale.
Selling Short
Selling a stock not actually owned. If an investor thinks the price of a stock is going down, the investor could borrow the stock
from a broker and sell it. Eventually, the investor must buy the stock back on the open market.
Series
1) Options: All option contracts of the same class with the same unit of trade, expiration date, and exercise price.
2) Stocks: Shares with common characteristics, such as rights to ownership and voting, dividends, or par value.
Share Broker
A discount broker who charges trades per share and reduces the per-unit charge as the number of shares traded increases, as
opposed to a dealer who charges a percentage of the dollar amount of the trade.
Shareholder
A person or entity that owns shares or equity in a corporation.
Shares
Certificates or book entries representing ownership in a corporation or similar entity.

2005 INVESTools Inc. All rights reserved.

page 19 of 28

THE 5-STEP INVESTING FORMULA

Glossary

www.investools.com

Short
One who has sold a contract to establish a market position and has not yet closed out the position through an offsetting
purchase.
Short Position
Occurs when a person sells stocks he or she does not yet own. Shares must be borrowed before the sale to make good
delivery to the buyer. Eventually, the shares must be bought back to close out the transaction. This is done when an investor
believes the stock price will drop.
Short Selling
Establishing a market position by selling a security one does not own in anticipation of that securitys price falling.
Short Term
Any investments with a maturity of one year or less.
Short-term Gain/Loss
A profit or loss realized from the sale of securities held for less than a year. This is taxed at normal income tax rates if the net
total is positive.
Sideways Market
A horizontal price movement within a narrow price range over an extended period of time, creating the appearance of a
relatively straight line on a stocks price graph.
Single Option
A single put option or call option, as opposed to a spread or straddle, which involves multiple puts and calls.
Slump
A temporary fall in performance, often describing consistently falling security prices for several weeks or months.
Smallcap
A stock with a small capitalization, meaning a total equity value of less than $500 million.
Soft Market
A buyers market in which supply exceeds demand, causing little trading activity and wide bid-ask spreads.
SPDRs (Spiders)
Designed to track the value of the S&P 500 Composite Price Index. They trade on the American Stock Exchange under the
symbol SPY. SPDRs are similar to closed-end funds, but are formally known as a unit investment trust. One SPDR unit is
valued at approximately one-tenth (1/10) of the value of the S&P 500. Dividends are disbursed quarterly and are based on the
accumulated stock dividends held in trust, less any expenses of the trust.
Speculation
Purchasing risky investments that present the possibility of large profits but also pose a higher-than-average possibility of loss.
A profitable strategy over the long term if undertaken by professionals who hedge their portfolios to control the amount of risk.
Split
When a company splits its outstanding shares into more shares. The investors equity in the company remains the same and the
share price of the stock owned is one-half the price of the stock on the day prior to the split.

2005 INVESTools Inc. All rights reserved.

page 20 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Split Stock
The division of the outstanding shares of a corporation into a large number of shares. Ordinarily, splits must be proposed by
directors and approved by shareholders.
Spread
1) The gap between bid and ask prices of a stock or other security.
2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different
months; also known as a straddle.
3) The difference between the price at which an issue is bought, and the price at which it is sold.
Spread Option
A position consisting of the purchase of one option and the sale of another option on the same underlying security with a
different exercise price and/or expiration date.
Spread Order
An order listing the series of options the customer wants to buy and sell and the desired spread between the premiums paid and
received for the options.
Spread Strategy
A strategy involving a position in one or more options so that the cost of buying an option is funded by selling another option
in the same underlying; also called spreading.
Stochastic Index
A tool measuring overbought and oversold conditions in a stock over a certain period.
Stock
Ownership of a corporation indicated by shares, which represent a piece of the corporations assets and earnings; a security.
Stockbroker
A person registered with the CFTC who is employed by and solicits business for a commission house or futures commission
merchant.
Stock Buyback
A corporations purchase of its own outstanding stock, usually in order to raise the companys earnings per share.
Stock Certificate
A document representing the number of shares of a corporation owned by a shareholder.
Stock Dividend
The payment of a corporate dividend in the form of stock rather than cash; often used to conserve cash needed to operate the
business. Stock dividends are not taxed until sold.
Stock Exchanges
Formal organizations approved and regulated by the SEC that are made up of members who use the facilities to exchange
certain common stocks. The two major national stock exchanges are the New York Stock Exchange (NYSE) and the American
Stock Exchange (ASE or AMEX).
Stock Index
An index like the Dow Jones Industrial Average that tracks the performance of a portfolio of stocks.

2005 INVESTools Inc. All rights reserved.

page 21 of 28

THE 5-STEP INVESTING FORMULA

Glossary

www.investools.com

Stock Index Future

A security using composite stock indexes to allow investors to speculate on the performance of the entire market or to hedge
against losses in long or short positions. The settlement of the contracts is in cash.
Stock Index Option
An option in which the underlying security is a common stock index.
Stock Market
Also called the equity market, the market for trading equities.
Stock Option
An option whose underlying asset is the common stock of a corporation.
Stock Purchase Plan
A plan allowing employees of a company to purchase company shares often at a discount, or matching employer funds.
Stock Split
Occurs when a firm issues new shares of stock and in turn lowers the current market price of its stock to a level that is
proportionate to pre-split prices.
Stock Ticker
A letter designation assigned to securities and mutual funds traded on U.S. financial exchanges.
Stop-Limit Order
A stop order designating a price limit. Unlike the stop order, which becomes a market order once the stop is reached, the stoplimit order becomes a limit order.
Stop-Loss Order
An order to sell a stock when the price falls to a specified level.
Stop Order (Stop-loss)
An order to buy or sell at the market when a definite price is reached, either above (on a buy) or below (on a sell) the price that
prevailed when the order was given.
Stopped
The guarantee of a specific price on the customers working order while the dealer tries to obtain a better one.
Stopped Out
A purchase or sale executed under a stop order at the stop price specified by the customer.
Straddle
The purchase or sale of an equal number of puts and calls with the same terms at the same time.
Strangle
Buying or selling an out-of-the-money put option and call option on the same underlying instrument with the same expiration.
Profits are made only if theres a drastic change in the underlying price.
Strike Price
The stated price per share for which underlying stock may be purchased (in a call) or sold (in a put) by the option holder upon
exercise of the option contract.

2005 INVESTools Inc. All rights reserved.

page 22 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Symbol
Letters used to identify companies on the exchanges.

T
Target Price
The price an investor hopes a stock will reach within a certain time period.
Technical Analysis
Security analysis that seeks to detect and interpret patterns in past security prices.
Technical Analysts
Analysts who use mechanical rules to detect changes in the supply of and demand for a stock in order to capitalize on the
expected change.
Tick
Refers to the minimum change in price a security can have either up or down.
Tick Indicator
A market indicator based on the number of stocks whose last trade was an uptick or a downtick. Used as an indicator of market
sentiment or psychology to try to predict the markets trend.
Ticker Tape
Computerized device that relays to investors the stock symbols and the latest price and volume on those stocks as they are
traded.
Time Order
An order that becomes a market or limited price order, or is cancelled at a specific time.
Time Until Expiration
The time remaining until a financial contract expires; also called time to maturity.
Toronto Stock Exchange (TSE)
Canadas largest stock exchange, trading approximately 1,200 company stocks and 33 options.
Total Cost
The price paid for a security, plus the commission and any accrued interest owed to the seller (as with a bond).
Total Dollar Return
The dollar return on a nondollar investment, including the sum of any dividend/interest income, capital gains or losses, and
currency gains or losses on the investment.
Total Return
In performance measurement, the actual rate of return realized over an evaluation period.
Total Revenue
Total sales and other revenue for the period shown.

2005 INVESTools Inc. All rights reserved.

page 23 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Total Volume
The total number of shares or contracts traded on national and regional exchanges in a stock, bond, commodity, future, or
option on a certain day.
Tracking Stock
A stock used for internal evaluation. For example, a firm with four divisions might set up four tracking stocks. The valueweighted sum of the four stocks exactly equals the firms stock price observed in the market.
Trade
An oral (or electronic) transaction involving one party buying a security from another party. Once a trade is consummated, it is
considered done or final. Settlement occurs 1-5 business days later.
Traders
Individuals who take positions in stock investments with the objective of making profits. Traders take proprietary positions in
which they seek to profit from the directional movement of prices or spread positions that can be held for long term or short
term.
Trading
The buying and selling of securities.
Trading Costs
Costs of buying and selling securities; includes commissions, slippage, and the bid/ask spread.
Trading Pattern
The long-range direction of a securitys price, charted by drawing a line connecting the highest prices the security has reached
and another line connecting the lowest prices at which the security has traded over the same period.
Trading Profit
The profit earned on short-term trades of securities held for less than one year, subject to tax at normal income tax rates.
Trading Range
The difference between the high and low prices traded during a period of time. For commodities, the high/low price limit an
exchange establishes a specific commodity for any one days trading.
Trading Unit
The number of shares of a particular security used as the acceptable quantity for trading on the exchanges.
Trading Volume
The number of shares transacted every day. Because there is a seller for every buyer, trading volume is half of the number of
shares traded.
Transaction
The delivery of a security by a seller and its acceptance by the buyer.
Transactions Costs
The time, effort, and money necessary including commission fees and the cost of physically moving the asset from seller to
buyer.
Trend
The general direction of the market.

2005 INVESTools Inc. All rights reserved.

page 24 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Trendline
A technical chart line that depicts the past movement of a security, and that is used to help predict future price movements.

U
Uncovered Call
A short call option position in which you do not own shares of the underlying stock represented by the option contracts. These
are much riskier than a covered call when you own the underlying stock. If the buyer of a call exercises the option to call, you
are forced to buy the asset at the current market price.
Uncovered Put
A short put option position in which you do not have a corresponding short stock position or you have not deposited cash or
cash equivalents equal to the exercise value of the put. You have pledged to buy the asset at a certain price if the buyer of the
option chooses to exercise it. Uncovered put options limit the risk to the value of the stock (adjusted for premium received.)
Also called naked puts.
Underlying Asset
The security agreement of an option that gives the option holder the right to buy or to sell.
Underlying Security
For options, the security that is subject to being purchased or sold upon exercise of an option contract.
Underperform
When a security is expected to or does appreciate at a slower rate than the overall performance of the market.
Undervalued
A stock price perceived to be too low, as indicated by a particular valuation model. For instance, a particular companys stock
price may be considered cheap if the company price-earnings ratio is much lower than the industry average.
Underwrite
To guarantee the issuer of securities a specified price by entering into a purchase and sale agreement. To bring securities to
market.
Underwriter
A firm, usually an investment bank, that buys an issue of securities from a company and resells it to investors. A party that
guarantees the proceeds to the firm from a security sale, thereby in effect taking ownership of the securities.
Unissued Stock
Shares authorized in a corporations charter but not issued.
Unmargined Account
A cash account held at a brokerage firm.
Up
Market indication that securities, or the market in general, is doing well in volume trading.
Uptick
An upward price movement in a particular stock. A trade occurring at a price higher than the previous sale.

2005 INVESTools Inc. All rights reserved.

page 25 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Upgrading
Raising the quality rating of a security because of new optimism about the prospects due to tangible/intangible factors. This can
increase investor confidence and push up the price of the security.
Upside Potential
The amount by which analysts or investors expect the price of a security may increase.
Upswing
An upward turn in a securitys price after a period of falling prices.
Uptick Trade
A transaction taking place at a higher price than the preceding transaction involving the same security.

V
V Formation
A technical chart pattern that follows a letter V form, indicating that the security price has bottomed out and is currently in a
bullish trend.
Valuation
A determination of the value of a companys stock based on earnings and the market value of assets.
Value Broker
A discount broker whose rates are a percentage of the dollar value of each transaction.
Variable
An element in a model; variables change through time and are not constant.
Volatility
A measure of risk based on the standard deviation of the asset return.
Volatility Risk
The risk in the value of options portfolios due to the unpredictable changes in the underlying asset volatility.
Volume
The daily number of shares of a security that change hands between a buyer and a seller.
Volume Discount
A reduction in price based on the purchase of a large quantity.

W
Wall Street
Generic term for the securities industry firms that buy, sell, and underwrite securities.
Watchlist
A list of securities selected for special surveillance, usually as potential investments.

2005 INVESTools Inc. All rights reserved.

page 26 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

Weak Market
A market with few buyers and many sellers, and a declining trend in prices.
Well-Diversified Portfolio
A portfolio that includes a variety of securities in order to approximate the overall market risk. The unsystematic risk of each
security is diversified throughout the portfolio.
Writer
The seller of an option who issues the option and, consequently, has the obligation to sell the asset (if a call) or to buy the asset
(if a put) on which the option is written if the option buyer exercises the option.

Y
Year-End Dividend
A special dividend declared at the end of a fiscal year that usually represents higher-than-expected company profits.
Year-to-Date (YTD)
The period beginning at the start of the calendar year up to the current date.
Yield
The percentage rate of return paid on a stock in the form of dividends.
Yo-Yo Stock
A highly volatile stock that moves up and down like a yo-yo.

2005 INVESTools Inc. All rights reserved.

page 27 of 28

THE 5-STEP INVESTING FORMULA

www.investools.com

Glossary

2005 INVESTools Inc. All rights reserved. Neither INVESTools or its subsidiaries nor any of their respective ofcers, employees, representatives, agents or independent
contractors are, in such capacities, licensed nancial advisers, registered investment advisers or registered broker-dealers. Neither do they provide investment or nancial
advice or make investment recommendations, nor are they in the business of transacting trades. Nothing contained in this manual constitutes a solicitation, recommendation,
promotion, endorsement or offer (buy or sell) by INVESTools, or others described above, of any particular security, transaction or investment.
Warranty disclaimer: The content included in this manual and the Investor Toolbox Web site is provided as is, without any warranties. Neither INVESTools
no any of its subsidiaries or afliates make any guarantees or warranties as to the accuracy or completeness of, or results to be obtained from using, any of its
products or services (including any content therein). INVESTools and its subsidiaries and afliates hereby disclaim any and all warranties, express or implied,
including warranties of merchantability or tness for a particular purpose or use. Neither INVESTools nor any of its subsidiaries or afliates shall be liable to you
or anyone else for any inaccuracy, delay, interruption in service, error or omission, regardless of cause, or for any damages resulting therefrom. In no event will
INVESTools nor any of its subsidiaries or afliates be liable for any indirect, special or consequential damages, including but not limited to lost time, lost money,
lost prots or lost good will, whether in contract, tort, strict liability or otherwise, and whether or not such damages are foreseen or unforeseen with respect to any
use of our products or services. In the event that liability is nevertheless imposed on INVESTools or any of its subsidiaries or afliates, such parties cumulative
liability for damages under any legal theory shall not exceed the amount of fees you paid for the particular product or service. This warranty addresses specic
legal rights; you may also have other rights, which vary from state to state. Some states do not allow the exclusion or limitation of incidental or consequential
damages, so the above limitation or exclusion may not apply to you.
The principals and employees of, as well as those who provide contracted services for, INVESTools have not promised, represented or warranted that you will earn a prot
when or if you purchase securities. It is recommended that anyone trading securities should do so with caution and consult with a broker before doing so. Past performances
of any principals and employees of, as well as those who provide contracted services for, INVESTools or any of its subsidiaries or afliates may not be indicative of
futur performance. Securities used as examples presented in this manual or the Investor Toolbox Web site are used for illustrative purposes only and do not constitute a
recommendation to buy or sell individual securities. They should be considered speculative with a high degree of volatility and risk.
Trading securities can involve high risks and the loss of any funds invested; trading options can result in the loss of more than the original amount invested.
No part of this manual may be reproduced in any form, by any means, photocopying, electronic or otherwise, without written permission from the publisher.

2005 INVESTools Inc. All rights reserved.

page 28 of 28