Trading terminology

Glossary

Aggressive- An investment strategy with an above-average risk tolerance, with the expectation of above-average returns. Aggressive strategies usually favor the purchase of stocks of rapidly growing companies, buying on margin, and options trading.

Buy and Hold - An investment strategy in which stocks are bought and then held for a long period of time, regardless of the market's fluctuations. This strategy is based on the assumption that in the very long term (10-20 years), stock prices will go up and the market as a whole will rise despite any short-term fluctuations due to business cycles or rising inflation. Trade commissions are reduced by buying and selling less often and taxes are often reduced or deferred by holding positions longer.

BUY AT OPEN - If you'd like to implement this type of trading order, then you should place a market order before the market opens up for trading (9:30 AM EST). When placing a market order, your trade will be filled at whatever the opening price is on that morning.

Capital gain- The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is the profit resulting from the sale of an investment. An unrealized capital gain is an investment that hasn't been sold yet but would result in a profit if sold. Capital gains generally receive more favorable tax treatment than ordinary gains. Depending on your tax bracket and on how long you held a capital asset, you may pay about one-third to one-half less tax on a capital gain than you would have paid on the same amount of ordinary income.

Capital loss- The loss that results from the sale of a capital asset. Ordinary income can be offset with capital losses up to a maximum of $3,000 per year and excess capital losses can be carried forward indefinitely until exhausted.

Close a Position -To end an investment. Closing a long position requires selling, and closing a short position requires buying.

Conservative - A cautious, risk-averse investment strategy. The preservation of capital is a high priority to a conservative investor.

Cover- To repurchase a previously sold contract.

Current Market Value -The present worth of a portfolio of securities at current market prices.

Day Trader - A very active stock trader who buys and sells the same security very quickly, executes a large number of trades each day, and generally closes all positions at the end of each trading day.

Diversification- A portfolio strategy focused on reducing exposure to risk by combining a variety of investments which are unlikely to all move in the same direction. Diversification reduces both the upside and downside potential and allows for more consistent performance under a wide range of economic conditions. A diversified portfolio may contain stocks, bonds and real estate.

Equity- Ownership interest in a corporation in the form of common stock or preferred stock. It can also be expressed as total assets minus total liabilities, referred to as "shareholder's equity", "net worth" or "book value". In the context of a futures trading account, it is the value of the securities in the account, assuming that the account is liquidated at the going price. In the context of a brokerage account, it is the net value of the account (the value of securities in the account less any margin requirements).

Fundamental Analysis -A method used to evaluate the value of a security, by which an investor would carefully examine the company's financial and operations, particularly sales, earnings, growth potential, assets, debt, management, products, and competition figures. Fundamental analysis considers variables that are directly related to the company itself, whereas technical analysis considers the overall state of the market.

Growth Strategy -A strategy based on investing in companies which are growing faster than others in the same industry, with the goal of generating capital gains rather than dividends.

Hedge funds- A fund which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Used generally by wealthy individuals and institutions, hedge funds are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts (ranging anywhere from $250,000 to over $1 million). Investors in hedge funds pay a management fee as well as a percentage of the profits (usually 20%).

IRA (Individual Retirement Account) -A tax-deferred retirement account for an individual that permits the individual to set aside up to $2,000 per year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or later.IRAs can be established at a bank, mutual fund, or brokerage. Only those who do not participate in a pension plan at work or who do participate and meet certain income guidelines can make deductible contributions to an IRA. All others can make contributions to an IRA on a non-deductible basis. Such contributions qualify as a deduction against income earned in that year and interest accumulates tax-deferred until the funds are withdrawn