Glossary

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Call Option – the owner of the call option has an agreement with the seller of the call option for the seller of the option to sell 100 shares of a security for each call option, to the holder  of the call option at a set price called the strike price, on or prior to (in an American style option contract) the expiration date of the option contract.

CPI – Consumer Price Index, the standard measure of INFLATION.

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EPS – Earnings Per Share – For a stock, this is calculated as the total net profit (usually for a quarter, but sometimes for a fiscal year) divided by the number of shares of the stock outstanding.

ETF – Exchange Traded Fund – Like a mutual fund, and ETF collects a pool of money from its investors and invests the money per the guidelines of the prospectus.  Many of these emulate a widely followed market index, such as the S&P 500 Large Cap index or the Russell 2000 index.  Since the target objective is so well defined, there is less management and the fees on ETFs are lower than on mutual funds.  ETFs trade just like stocks; they are actively traded when the market is open, and NOT at the NAV price.  ETFs have bid / ask prices and they may trade at a premium (above the NAV) if there is high demand for the ETF, or at a discount (below the NAV) is demand for the ETF is lower than for the underlying assets.

F

FASB – Financial Accounting Standards Board, is an industry group that sets rules for accounting by companies and the SEC has stipulated that public companies under SEC regulation must comply with the FASB rules for reports submitted to the SEC.

G

GAAP – Generally Accepted Accounting Principles, the set of accounting rules specified by the Financial Accounting Standards Board (FASB) that companies must comply with for their financial reporting to the SEC.

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M

MACD (Moving Average Convergence/Divergence) – A technical analysis indicator that is calculated by subtracting the 26-period exponential moving average of a given security from its 12-period exponential moving average. By comparing moving averages, MACD displays trend following characteristics, and by plotting the difference of the moving averages as an oscillator, MACD displays momentum characteristics.

Market Capitalization – This is the dollar value of a company on the stock exchange.  Multiply the number of shares outstanding for the company by the price per share.

Multiple (or Market Multiple) – This is the same as the P/E ratio of the S&P 500 index rounded to the nearest whole number.  If the S&P is selling at 1,500 and the sum of the earnings per share of the 500 companies comes up to $100, then the P/E is the total price (1,500) divided by the total earnings per share ($100), or 1,500 / 100 = 15.  The multiple of the market would be 15.

Mutual Fund – This is a pool of money collected by a securities company and invested according to the objectives and rules outlined in the prospectus.  The fund will have a manager who will decide what securities are purchased in order to generate the best return he can achieve within the constraints of the prospectus.  The fund manager’s compensation is usually tied to performance relative to a public benchmark, for example a stock fund’s performance may be judged relative to how it performs compared to the S&P 500 large cap index.  These are traded at the end of the trading day at the NAV.

N

NAV – Net Asset Value.  For an investment fund (mutual fund or Exchange Traded Fund – ETF), this is the total market value of the total assets of the fund at a particular point in time (most funds set this at the end of the trading day), divided by the number of shares in the fund.  Mutual funds are bought and sold at the end of the day after the NAV is calculated.  ETFs are traded all day long like a stock, with a bid and ask price that can be higher than the actual NAV (a premium to NAV) or lower than the NAV (a discount to NAV).

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Put Option – the owner of the put option has an agreement with the seller of the option for the seller of the option to buy 100 shares of a security for each put option, from the holder  of the put option at a set price called the strike price, on or prior to (in an American style option contract) the expiration date of the option contract.

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RSI (Relative Strength Index) – A popular technical analysis oscillator which is plotted on a vertical scale from 0 to 100. Values above 70 are considered overbought and values below 30, oversold. When the value of RSI is over 70 or below 30 and diverges from price action, a warning is given of a possible trend reversal.

S

S&P – This will refer to the Standard and Poors 500 Large Cap Index, unless specified otherwise.  S&P does maintain several other indexes, but they are not as widely followed as the 500 Large Cap Index.

SEC – Securities and Exchange Commission, the federal agency that regulates stock reporting regulations in the US.

Strike Price – One of the components of PUT and CALL options, the strike price is the price at which the transaction will be executed, if the option is exercised.

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