Stock Market Terms

For those of you contemplating embarking upon a foray into the world of share / equity investment, the following glossary of terms might give you some small amount of insight as you navigate your way around the jargon filled arena of the world’s stock markets.

It might also be of some use to you to review the FAQ section of the Commonwealth Bank’s “Commsec” website that can be accessed by clicking the purple link in this paragraph.

Of particular interest to you might be their FAQ on the issue of:

What is the minimum amount of shares I am able to purchase?

Bull	Someone who believes the market will rise.  The opposite of a bear.
Bear	Someone who believes the market will decline.  The opposite of a bull.
Call	An option contract that gives the holder the right, but not the obligation, to buy the underlying security at a specified price for a certain, fixed period of time.
American option	This is an option contract that may be exercised at any time between the date of purchase and the expiration date.
Covered call  option writing	A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy.
Dividend payout ratio	The ratio found by dividing the annual dividends per share by the annual earnings per share.
Dividend yield	The yield found by dividing the annual dividends per share by the price per share (This yield is an indication of the income from a share of stock. Since return on a stock is comprised of capital gain plus dividends, the total return is comprised of dividend yield plus the capital gains percentage for stock.)
Dividend	A sum of money, determined by a company’s directors, paid to shareholders of a corporation out of earnings.
Exercise	To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.
Exercise price	See Strike price.
Expiration cycle	An expiration cycle relates to the dates on which options on a particular underlying security expire.  Most options have either a monthly or quarterly expiration cycle.
Expiration date	Date on which an option, and the right to exercise it, cease to exist.
Expiration time	The time of day by which all exercise notices must be received on the expiration date.
Full-service broker	A broker who can execute buy and sell orders, perform research, and help investors develop a plan for meeting financial goals.
Fundamental analysis	An analysis of stocks based on fundamental factors, such as company earnings, growth potential, etc., to determine a company’s worth, strength, and potential for growth.
In-the-money	A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
Intrinsic value	The amount by which an option is in-the-money.
Long position	A position wherein an investor’s interest in a particular series of options is as a net holder (i.e. the number of contracts bought exceeds the number of contracts sold).
Naked writer	Uncovered call writing or uncovered put writing.
Out-of-the-money	A call option is ‘out-of-the-money’ if the strike price is greater than the market price of the underlying security. A put option is ‘out-of-the-money’ if the strike price is less than the market price of the underlying security.
Premium	The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract.
Put	An option contract that gives the holder the right to sell the underlying security at a specified price for a fixed period of time.
Short position	A position wherein a person’s interest in a particular series of options is as a net writer (ie: the number of contracts sold exceeds the number of contracts bought).
Spread	The difference between the bid (purchase) and ask (sell) prices.
Stock dividend	A dividend paid in shares of stock as a substitute for cash (Stock dividends allow dividends to make money on themselves.)
Stop-loss	The level at which you would close a position should that position be unprofitable.
Strike price	The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
Technical analysis	The analysis of historical trends of price, volume, and other related market indicators to aid in predicting future trends.
Time value	The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract.  Time value is whatever value the option has in addition to its intrinsic value.
Uncovered call writing	A short call option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
Volume	The total shares of a stock traded on the most recent trading day.
Writer	The seller of an option contract.
Yield	The value found by dividing the amount of interest paid on a bond by the price, thus measuring the income from a bond.  (The term also refers to the dividend from stock divided by its price.  Yield, however, is not a measure of total return since it does not include capital gains or losses.) Peter Kerin Peter Kerin