Glossary

Optionetics Trading Education Center

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%b
Indicates where the closing price is within Bollinger bands.

Back Months
The futures or options on futures months being traded that are furthest from expiration.

Back Office
Brokerage house or bank departments not directly involved in selling or trading. Accounting records, compliance with government regulations and communications between branches are handled in back offices. When stock market trading is very heavy, order processing can be slowed by massive volume-this is referred to as a back-office crunch.

Back-Propagation Network
A feed-forward multi-layered neural network that is a commonly used neural network paradigm.

Backspread
A spread in which more options are purchased than sold and where all options have the same underlying and expiration date. Backspreads are usually delta neutral.

Back-Testing
A strategy is tested or optimized on historical data and then is applied to new data to see if the results are consistent.

Back-up
Occurs when there is a sudden reversal of a stock market trend. Traders would refer to this as a market back-up.

Back-end Load
A commission or sales fee that is charged upon the redemption of mutual fund shares or variable annuity contracts. It declines annually to zero over an extended holding period as described in the prospectus.

Back Office
Brokerage house clerical operations that support, but do not include, the trading of stocks and other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory compliance.

Back-up Line
A bank line of credit in the name of an issuer of commercial paper, covering maturing notes in the event that new notes cannot be marketed to replace them. Ideally the unused line should always equal the commercial paper outstanding. In practice, something less than total coverage is common because the compensating balances normally required to support the line of credit are also available to meet maturing paper.

Backlog
The value of unfilled orders placed with a manufacturing company. Whether the backlog is rising or falling is a clue to the company's future sales and earnings.

Balance of Payments (BOP)
An international accounting record of all transactions made by one particular country with others during a certain time period; it compares the amount of foreign currency the country has taken in to the amount of its own currency it has paid out.

Balance of Trade
The largest component of a country's balance of payments; it concerns the export and import of merchandise (not services). Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy.

Balance Sheet
A report of a corporation's financial condition at a specific time.

Balance Sheet Equation
A formula stating that a corporation's assets equal the sum of its liabilities plus shareholders' equity.

Balanced Fund
A mutual fund whose stated investment policy is to have at all times some portion of its investment assets in bonds and preferred stock as well as in common stock in an attempt to provide both growth and income.

Balanced Investment Strategy
A method of portfolio allocation and management aimed at balancing risk and return; a balanced portfolio may combine stocks, bonds, packaged products and cash.

Balloon
In some serial bond issues, a balloon is an extra-large amount that may mature in the final year of the series.

Balloon Maturity
A repayment schedule for an issue of bonds wherein a large number of the bonds come due at a prescribed time (normally at the final maturity date); a type of serial maturity.

Balloon Payment
Final repayment of principal on outstanding debt, where the repayment at maturity exceeds amounts repaid periodically throughout the life of the debt.

Bandpass Filter
An oscillator that accentuates only the frequencies in an intermediate range and rejects high and low frequencies. Implemented by first applying a low pass filter to the data and then a high pass filter to the resulting data (e.g., two SMA crossover system).

Bank for International Settlements (BIS)
The BIS is an international financial institution that promotes the co-operation of central banks, fulfills the function of central banks' bank and acts as a clearing and settlement agent. It acts as a forum for discussion of international monetary policy and conducts research into international banking developments.

Bank Investment Contracts (BICs)
A negotiated-term deposit issued by a commercial bank.

Bankers' Acceptances
A short-term debt (promissory note) issued by a firm on which a bank guarantees payment. Acceptances are traded at discounts from face value in the secondary market. These instruments have been a popular investment for money market funds.

Banking Group
A group of investment dealers, each of which individually assumes financial responsibility for part of an underwriting of a new issue of securities for a corporation.

Bankrupt
The legal status of an individual or company which is unable to pay its creditors and whose assets are therefore administered for its creditors by a trustee in bankruptcy.

Bar Chart
A chart that graphs the high, low, and settlement prices for a specific trading session over a given period of time.

Basis
The price an investor pays for a security plus any out-of-pocket expenses. It is used to determine capital gains or losses for tax purposes when the stock is sold.

Basis Point
A measure of a bond's yield, equal to 1/100th of 1% of yield. A bond whose yield increases from 5.0% to 5.5% is said to increase by 50 basis points.

Basket Trades
Large transactions made up of a number of different stocks.

Bayes Decision Rule
A rule that states the strategy chosen from those available is that for which the expected value of payoff is the greatest.

Bear
An investor who acts on the belief that a security or the market is falling or is expected to fall. (See also: Bull)

Bear Call Spread
A strategy in which a trader sells a lower strike call and buys a higher strike call to create a trade with limited profit and limited risk.

Bearer Security
A stock or bond that does not have the owner's name recorded in the books of the issuing company or on the security certificate itself. The holder of the certificate is the owner. Interest, dividends or any profits from sales are payable to the holder.

Bear Hug
A term used to describe a takeover bid that is so attractive in terms of price and other features that the target company directors must approve it, even if they have legitimate concerns or risk shareholder protest.

Bear Market
A declining stock market over a prolonged period, usually lasting at least 6 months and normally not more than 18 months. Usually caused by a strong conviction that a weak economy will produce depressed corporate profits. Also, a market in which prices of a certain group of securities are falling or are expected to fall. (See also: Bull Market)

Bear Put Spread
A strategy in which a trader sells a lower strike put and buys a higher strike put to create a trade with limited profit and limited risk.

Bear Raid
The attempt by investors to manipulate a stock price by selling large numbers of shares short. The difference between the initial price and the new, lower price after this maneuver is profit kept by the manipulators.

Bear Spread
Any spread in which a decline in the price of the underlying will increase the value of the spread. Bear spreads can be traded at a debit or credit to the trader. With calls: net credit transaction; maximum loss = difference between the strike prices less credit; maximum gain = credit; requires margin. With puts: net debit transaction; maximum loss = difference between strike prices less the debit; no margin.

Bell
Refers to a signal that may be a bell or buzzer, which opens and closes trading on major stock exchanges.

Beneficial Owner
The real owner of a security. An investor may have securities registered in the name of a broker, trustee or bank to facilitate transfer or to preserve anonymity, but the investor is the beneficial owner and will receive any dividends, interest or profits from sales.

Benefit/Cost Ratio
For a capital-expenditure project, the ratio of discounted after-tax cash inflows divided by discounted after-tax cash outflows. Projects for which this ratio exceeds 1 show a positive return and are deemed acceptable.

Best Efforts Underwriting
The underwriter agrees to use his or her best efforts to sell a new issue of securities, but does not guarantee to the issuing company that any or all of the issue will be sold. The underwriter acts as an agent for the issuer in distributing the issue to his clients.

Beta
A regression of the estimated coefficient that belongs to a particular variable.

Beta (Coefficient)
A measure of the market/nondiversifiable risk associated with any given security in the market. A ratio of an individual's stock historical returns to the historical returns of the stock market.

Beta (Mutual Funds)
The measure of a fund's risk in relation to the market. A 0.7 means the fund's total return is likely to move up or down 70 % of the market change; 1.3 means total return is likely to move up or down 30 % more than the market.

Beta (Stocks)
Measure of a stock's risk in relation to the market. A 0.7 means a stock price is likely to move up or down 70 % of the market change; 1.3 means the stock is likely to move up or down 30 % more than the market.

Beta Coefficient
A means of measuring the volatility of a security or portfolio of securities in comparison with the market as a whole. A beta of 1 indicates that the security's price will move with the market. A beta greater than 1 indicates that the security's price will be more volatile than the market. A beta less than 1 means it will be less volatile than the market.

Beta Equation (Stocks)
The beta of a stock is determined as follows:
[(n) (sum of (xy))]-[(sum of x) (sum of y)]
[(n) (sum of (xx))]-[(sum of x) (sum of x)]
n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

Beta Equation (Mutual Funds)
The beta of a fund is determined as follows:
[(n) (sum of (xy))]-[ (sum of x) (sum of y)]
[(n) (sum of (xx))]-[(sum of x) (sum of x)]
n = # of observations (36 months)
x = rate of return for the S&P 500 Index
y = rate of return for the fund

Beta Stock
The designation 'beta stock' was used on the London Stock Exchange to refer to the second tier in a four-level hierarchy classification system introduced with Big Bang in October 1986. This system was replaced with the Normal Market Size (NMS) classification system in January 1991. Alpha stocks represented the equivalent of North American Blue Chip issues while beta stocks represented smaller issues that were less actively traded.

Bias
The difference between the expected value of an estimator and the actual value to be estimated.

Bid
An indication by an investor, a trader or a dealer of a willingness to buy a security or commodity; the price at which an investor can sell to a broker-dealer.

Bid and Asked
The bid is the highest price a prospective buyer is prepared to pay for a specified time for a trading unit of a specified security. The asked is the lowest price acceptable to a prospective seller of the same security. Together, the bid and asked prices constitute a quotation or quote and the difference between the two prices is the bid-asked spread. The bid and asked dynamic is common to all securities, but usually refers to unlisted securities traded over the counter.

Bid-asked Spread
The difference between bid and offer prices. The term asked is usually used in over the counter trading. The term offered is used in exchange trading. The bid and asked, or offered, prices together comprise a quotation, or quote.

Bid Up
The demand for the asset will drive the price you pay.

Big Bang
A term used to refer to the deregulation on October 27, 1986 of the London-based securities market. This event is comparable to May Day in the United States. Big Bang marked a major step toward a single world financial market.

Bimodal Distribution
In which observations are displayed as having two distinct peaks.

Blitzkreig Tender Offer
A takeover term for a tender offer completed very quickly. 'Blitzkreig' translates from German as 'lightning-like war.' The takeover is usually completed very quickly because it was attractively priced.

Block Trade
A trade so large that the normal auction market cannot absorb it in a reasonable time at a reasonable price. In general, 10,000 shares of stock or $200,000 worth of bonds would be considered a block trade.

Blow-off Top
A steep and rapid increase in price followed by a steep and rapid drop in price. This is an indicator seen in charts and used in technical analysis of stock price and market trends.

Blue Chips
A term derived from poker where blue chips in a card game held the most value. Blue chips in the stock market are those stocks that have the most market capitalization of all the stocks in the marketplace.

Blue Chip Stock
This has come to symbolize a stock that has solid value and good security, with a record of continuous dividend payments and other desirable investment attributes.

Blue-sky Laws
The nickname for state regulations governing the securities industry. The term was coined in the early 1900s by a Kansas Supreme Court justice who wanted regulation to protect against speculative schemes that have no more basis than so many feet of blue sky.

Board Lot
The smallest quantity of shares traded on an exchange at standard commission rates.

Board of Directors
1. Individuals elected by stockholders to establish corporate management policies.
2. A board of directors decides, among other issues, if and when dividends will be paid to stockholders.
3. The body that governs the NYSE; it is composed of 20 members who are elected for a term of two years by the NYSE general membership.

Boiler Rooms
Also known as Bucket Shops, these are companies whose sole purpose is to separate you from your money. Boiler rooms use high-pressured sales tactics to sell you penny stocks. They first will call you to offer you an investment newsletter (this is okay, as many creditable firms do this), but a couple of months later you will get a phone call offering you the opportunity of a lifetime. Find out of their company is a member of a recognized regulatory body. The bottom line is this: if they try to sell you a stock without knowing anything about you (i.e., age, assets, risk tolerance, investment goals), hang-up the phone!

Bollinger Bands
Bollinger bands plot trading bands above and below a simple moving average. The standard deviation of closing prices for a period equal to the moving average employed is used to determine the bandwidth. This causes the bands to tighten in quiet markets and loosen in volatile markets. The bands can be used to determine overbought and oversold levels, locate reversal areas, project targets for market moves, and determine appropriate stop levels. The bands are used in conjunction with indicators such as RSI, MACD histogram, CCI and Rate of Change. Divergences between Bollinger bands and other indicators show potential action points. As a general guideline, look for buying opportunities when prices are in the lower band, and selling opportunities when the price activity is in the upper band.

Bond
A debt obligation issued by a government (i.e., Treasury bond) or corporation (i.e., corporate bond) that promises to pay its bondholders periodic interest at a fixed rate (the coupon), and to repay the principal of the loan at maturity (a specified future date). Bonds are usually issued with a par or face value of $1,000, representing the principal or amount of money borrowed. The interest payment is stated on the face of the bond at issue.

Bond Fund
A mutual fund whose investment objective is to provide stable income with a minimal capital risk. It invests in income-producing instruments, which may include corporate, government or municipal bonds. Mutual funds that invest primarily in bonds are also called 'income' funds.

Bond Quote
One of a number of quotations listed in the financial press and most daily newspapers that provide representative bid prices from the previous day's bond market. Quotes for corporate and government bonds are percentages of the bond's face value (usually $1,000). Corporate bonds are quoted in increments of 1/8th. Government bonds are quoted in 1/32nds. Municipal bonds may be quoted on a dollar basis or on a yield-to-maturity basis.

Bond Rating
An evaluation of the possibility of default by a bond issuer, based on an analysis of the issuer's financial condition and profit potential. Bond rating services are provided by, among others, Standard & Poor's, Moody's Investors Service and Fitch Investors Service.

Book Crowd
Members of a stock exchange who trade in infrequently traded bonds. Also referred to as: inactive bond crowd or cabinet crowd.

Book Value
For each common share, it equals the net worth of a firm as shown on the balance sheet, less the par value of outstanding preferred shares, divided by the number of common shares outstanding.

Boolean
Describes a variable that may have one of only two possible values: true or false. Named after George Boole, English logician, who was credited with the invention of 'Boolean logic.'

Bought Deal
An entire issue of new stocks or bonds bought from the issuer by an investment dealer, frequently acting alone, for resale to its clients. The dealer risks its own money in a bought deal, and in the event that the price has to be lowered to sell out the issue, the dealer absorbs the loss.

Box
Refers to the physical location of securities or other documents held in safekeeping. This term is derived from the metal box or tray in banks or brokerage firms where such valuables are actually placed.

Box-Jenkins Linear Least Squares
The additive structure of Box-Jenkins models with a polynomial structure. Box-Jenkins Method From G.E.P. Box and G.M. Jenkins, who authored Time Series Analysis: Forecasting and Control. The method refers to the use of autoregressive integrated moving averages (ARIMA), which fit seasonal models and nonseasonal models to a time series.

Box-Jenkins Nonlinear Least Squares
The multiplicative structure of Box-Jenkins models using the Gauss-Newton algorithm with numerical derivatives.

Bozu
Literally 'bald' or 'monk' in Japanese; in candlestick terminology refers to a situation during which a trading cycle opens or closes on a high or low, indicating a victory for the bulls or the bears.

Brain Dead
Refers to companies that continue operations even though they are insolvent and bankrupt. These companies may also be referred to as living dead or zombies.

Bracketing
A trading range market or a price region that is non-trending.

Breadth-of-Market Theory
A technical analysis theory that predicts the strength of the market according to the number of issues that advance or decline in a particular trading day.

Breakaway Gap
When a tradable exits a trading range by trading at price levels that leaves a price area where no trading occurs on a bar chart. Typically, these gaps appear at the completion of important chart formations.

Break-even Point
1. The point at which gains equal losses.
2. The market price that a stock must reach for an option buyer to avoid a loss if he exercises.
3. For a call, it is the strike price plus the premium paid.
4. For a put, it is the strike price minus the premium paid.

Breakout
A rise in a security's price above a resistance level (commonly its previous high price) or drop below a level of support (commonly the former lowest price.) A breakout is taken to signify a continuing move in the same direction. Can be used by technical analysts as a buy or sell indication.

Broad-based Index
An index that is designed to reflect the movement of the market as a whole. Examples include the S&P 100, the S&P 500, the AMEX Major Market Index and the Value Line Composite Index.

Broadened Base Earnings
A concept whereby the earnings per share of a company are computed to include a pro rata share of the earnings of all unconsolidated subsidiaries and associated companies.

Broker
1. An individual or firm that charges a fee or commission for executing buy and sell orders submitted by another individual or firm.
2. The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.

Broker-Dealer (BD)
A person or firm in the business of buying and selling securities. A firm may act as both broker (agent) and dealer (principal) but not in the same transaction.

Broker's Deck
Orders physically held by the floor broker in the trading pit.

Bull
An investor who acts on the belief that a security or the market is rising or is expected to rise. (See also: Bear)

Bull Market
A rising stock market over a prolonged period, usually lasting at least 6 months and normally not more than 18 months. Usually caused by a sound conviction that a strong economy will produce increased corporate profits. Also, a market in which prices of a certain group of securities are rising or are expected to rise. (See also: Bear Market)

Bull Spread
Any spread in which a rise in the price of the underlying will increase the value of the spread. Bull spreads can be traded at a debit or credit to the trader. With calls: net debit transaction; maximum loss = debit; maximum gain = difference between strike prices less the debit; no margin. With puts: net credit transaction; maximum loss = difference between strike prices less credit; maximum gain = credit; requires margin.

Business Cycle
A predictable long-term pattern of alternating periods of economic growth and decline. The cycle passes through four stages: expansion, peak, contraction, and trough.

Business Day (Finance & Investments)
A day when financial marketplaces are open for trading. In calculating the settlement date on a regular securities transaction (which is the fifth business day after the trade date), Saturday, Sunday and legal holidays would not be counted.

Business Day (General)
Hours when most businesses are in operation. Individual working hours may differ and some companies may choose staggered schedules, but the conventional business day is 9 A.M. to 5 P.M., Monday to Friday.

Bust-up Takeover
Refers to a leveraged buyout in which target company assets or projects are sold off to repay the debt that financed the takeover.

Butterfly Spread
The sale (purchase) of two identical options, together with the purchase (sale) of one option with an immediately higher strike, and one option with an immediately lower strike. All options must be the same type, have the same underlying and have the same expiration date.

Buy on Close
To buy at the end of a trading session at a price within the closing range.

Buy on Opening
To buy at the beginning of a trading session at a price within the opening range.

Buy Stop Order
An order to buy a security that is entered at a price above the current offering price and that is triggered when the market price touches or goes through the buy stop price.

Buy-ins
If the seller of a security fails to deliver the securities sold to another person within a specified number of days after the settlement date, the buyer may purchase the securities in the open market and charge the seller the cost of such purchases.

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