Stock Market Definitions

Bonds (Junk)  Junk bonds are issued by the company that is in poor financial  condition.  Those bonds have interest rates about 3-4% higher than regular bonds to compensate buyers for the higher risk taken. 

Book Value  is the company's assets minus the liabilities plus liquidation price of any preferred issues.

Buying to Cover  after someone shorts shares of a stock, they repay back the shares they borrowed by buying the same shares back on the open market.

Call option  the right to purchase stock at a strike price at any time before the predetermined deadline.  After the deadline, the option is expires.  The advantage of a call option is the ability to control a large amount of shares with just a little bit of money.  If the option never makes the call price though, you lose all of your money paid for the option. (such as a call option to buy WMT at 50 at $2 a option with a May deadline.  Your cost is 2 dollars for every option you take.  So if you take 10 options and WMT makes it to 55 in May u make $3 a option)

Correction  a move down in the DIJA of more than 10% which can be over a short period of time (a week or two) or all in one day.  

Cyclical Stocks  stocks that do well when the economy is in a recovery and do bad when in a recession. 

Dilution of Shares  happens when you add shares to the shares outstanding for a stock.  

Dividend  A portion of the net profits paid directly to the stockholders paid at a fixed amount.

Diversification  reducing risk by investing in many securities and investments. (such as 25% in bonds, 25% in mutual funds, 50% in stocks)

Dollar Cost Averaging  a method of investing in a particular equity by investing a fixed amount at regular intervals. (such as monthly buying $1000 worth of MSFT every month.  You buy it at 71, 83, 76, 90. Your dollar cost average is 80)

Dow Jones Industrial Average  the average of 30 bull chip stocks hand picked by the Wall Street Journal editors.  The dow is an indication of the well being of the overall market.

Earning Per Share  Net income divided by the shares outstanding

Float the number of shares available for trading by the public that are not held by insiders or large investors.

Growth Stock  stock of a company in which revenue and earning are growing at a above average rate (more than about 15% a year)

Index Fund  a fund that has a goal of matching the performance of an  index such as the S & P 500 by buying the exact stocks that are in the index. 

Initial Public Offering (IPO)  a company's first offering of stock to the public in order to raise money.

Margin Call  When the % of equity verses the debt falls below the broker's min. standards, a call is issued to either come up with the money to bring the equity back to 50% or the shares of the portfolio will be sold to bring it up to 50%.  There is usually only a few days to come up with the money. (if you have 1000 dollars and buy 20 shares of CMGI at $100 a share.  Thus borrowing $1000.  If your broker min. requirement  is 30%, then you will get a margin call if CMGI drops to 71 1/4. After your margin call you are either expected to pay $575 or 8 shares of your CMGI will be sold bringing your total value of your portfolio to 425. Using margin can double your profits or double your losses. Be careful and is a good habit to either not use it or borrow 20% or less of your stock's value)

Margin Buying (Buying Stocks on Margin)  Interest on borrowing on margin is far lower than any credit card and about as cheap as a home mortgage interest rate. If used properly is can be a great tool.  You are allowed to borrow up to 50% of your stock's current value. You can use that borrowing power to buy more stock or use the cash for something else. So with $1000 worth of cash you can buy $2000 worth of stock borrow $500 worth of cash.

Mutual Fund a company that is takes a the investors money and invest it any number of investments from bonds to stocks.  A fund is required to buy your shares from you when u sell some of the shares which could be higher or lower than what u pay for them.

Overbought  An equity (or market) that has gone up in a hurry, making the price too high in which the stock seems to be overvalued. 

Oversold  An equity (or market) that has gone down to which its valuation seems to support buying of the stock.

P/E Price/Earning Ratio current price of the shares divided by the EPS (earnings per share)

Secondary Offering  Selling of a large block of shares issued by companies to raise additional money.  Some of the shares that make up the offering could be from insiders selling and some may be new shares issues thus increasing the outstanding shares and possibly diluting the shares. 

Shares Outstanding  Total number of shares issued by a corporation.

Short Sale  Selling shares of a stock that you don't own by borrowing the shares in which to sell.  The goal is to buy them buy at a cheaper price for a gain if you think the stock is going to drop.  

Split  To increase or decrease the shares outstanding requiring stockholder approval.  (A 2 for 1 split would double the outstanding shares)

Stop Order  Is a market order to buy or sell a stock at a specified price. 

Strike Price  The fixed price on a call or put option in which the option holder can execute the option.

Support Level  is referred either as index average like the DJIA or an individual stock in which the buyers start to out number the sellers.  Resistance level is the opposite of support level.