After Test 2

Red Herring

A red herring is a preliminary prospectus filed by a company with the Securities and Exchange Commission (SEC), usually in connection with the company's initial public offering. A red herring prospectus contains most of the information pertaining to the company's operations and prospects but does not include key details of the issue, such as its price and the number of shares offered.

IPO Underpricing

An Initial Public Offering (IPO) is the initial offering of stock to the public by a company seeking to raise capital for funding and future growth. When a company first offer shares to the public, they hope to price them as high as is possible, thereby raising the most capital. Banks and others who are submitting the shares to the floor aim for lower prices. They hope to sell as many shares as is possible, thereby increasing the flow of shares and their profit from trading expenses. Determining the offering price includes many factors with quantitative factors considered first.

Event Study

An event study is an empirical analysis performed on a security that has experienced a significant catalyst occurrence, and has subsequently changed dramatically as a result. Examples of events that influence the value of a security include a company filing for Chapter 11 bankruptcy protection, the positive announcement of a merger or the result of the company defaulting on its debt obligations. Event studies can reveal important information about how a security is likely to react to a given event, and can help predict how other securities are likely to react to different events.

Initial Public Offering

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.

Dow Theory

Dow Theory is an analysis that explores the relationship between the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA). When one of these averages climbs to an intermediate high, then the other is expected to follow suit within a reasonable amount of time.

Technical Analysis

Technical analysis studies trends and uses them to forecast price movements of both single commodities and entire commodities alike. In the commodities futures world, players are concerned with the interrelationship between trends of three market elements: Price, Volume and Open interest.

Illegal Insider Trading

Insider trading occurs when a trade has been influenced by the privileged possession of corporate information that has not yet been made public. Because the information is not available to other investors, a person using such knowledge is trying to gain an unfair advantage over the rest of the market.

Mental Accounting

Mental accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account.

NASDAQ

The Nasdaq Stock Market began trading on February 8, 1971. It was the world's first electronic stock market.[5] At first, it was merely a "quotation system" and did not provide a way to perform electronic trades.[6][not in citation given] The Nasdaq Stock Market helped lower the spread (the difference between the bid price and the ask price of the stock) but was unpopular among brokerages which made much of their money on the spread.

Elliot Waves

The Elliott wave principle is a form of technical analysis that finance traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors

NYSE

The New York Stock Exchange (abbreviated as NYSE and nicknamed "The Big Board"),[6] is an American stock exchange located at 11 Wall Street, Lower Manhattan, New York City, New York. It is by far the world's largest stock exchange by market capitalization of its listed companies at US$21.3 trillion as of June 2017. The average daily trading value was approximately US$169 billion in 2013.

SEC

The Securities and Exchange Commission (SEC) is a U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception. The SEC consists of five commissioners who serve staggered five-year terms.

Random Walk

The random walk theory suggests that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement. In short, this is the idea that stocks take a random and unpredictable path.

Secondary Market

The secondary market is where investors buy and sell securities they already own. It is what most people typically think of as the "stock market," though stocks are also sold on the primary market when they are first issued. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.

Semi-strong EMH

The semi-strong form EMH implies that the market is efficient, reflecting all publicly available information. This hypothesis assumes that stocks adjust quickly to absorb new information. The semi-strong form EMH also incorporates the weak-form hypothesis. Given the assumption that stock prices reflect all new available information and investors purchase stocks after this information is released, an investor cannot benefit over and above the market by trading on new information.

Strong form EMH

The strong-form EMH implies that the market is efficient: it reflects all information both public and private, building and incorporating the weak-form EMH and the semi-strong form EMH. Given the assumption that stock prices reflect all information (public as well as private) no investor would be able to profit above the average investor even if he was given new information.

PEAD

is the tendency for a stock's cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks (even several months) following an earnings announcement.

Reasoning Errors

Error in reasoning means the use of invalid or otherwise faulty reasoning ...

Resistance Level

In stock market technical analysis, support and resistance is a concept that the movement of the price of a security will tend to stop and reverse at certain predetermined price levels. These levels are denoted by multiple touches of price without a breakthrough of the level.

Insider Trading

The buying or selling of a security by someone who has access to material, nonpublic information about the security.

Loss Aversion

refers to people's tendency to prefer avoiding losses to acquiring equivalent gains: it is better to not lose $5 than to find $5. The principle is very prominent in the domain of economics.

Overreaction

Overreaction is an emotional response to new information about a security, which is led either by greed or fear. Investors, overreacting to news, cause the security to become either overbought or oversold, until it returns to its intrinsic value.

Prospect Theory

Prospect theory argues that if given the option, people prefer certain gains rather than the prospect of larger gains with more risk.

House Money Effect

The tendency for investors to take more and greater risks when investing with profits. The house money effect gets its name from the casino phrase "playing with the house's money."

Prospectus

A Prospectus is a formal legal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering for sale to the public. The preliminary prospectus is the first offering document provided by a security issuer and includes most of the details of the business and transaction in question; the final prospectus, containing finalized background information including such details as the exact number of shares/certificates issued and the precise offering price, is printed after the deal has been made effective. In the case of mutual funds, a fund prospectus contains details on its objectives, investment strategies, risks, performance, distribution policy, fees and expenses, and fund management.

Bid

A bid is an offer made by an investor, a trader or a dealer to buy a security, commodity or currency. It stipulates both the price the potential buyer is willing to pay and the quantity to be purchased at that price. Bid also refers to the price at which a market maker is willing to buy; unlike a retail buyer, a market maker also displays an ask price.

Broker

A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.

Commissions

A commission is a service charge assessed by a broker or investment advisor in return for providing investment advice and/or handling the purchase or sale of a security. Most major, full-service brokerages derive much of their profits from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage.

Spreads

A commission is a service charge assessed by a broker or investment advisor in return for providing investment advice and/or handling the purchase or sale of a security. Most major, full-service brokerages derive much of their profits from charging commissions on client transactions. Commissions vary widely from brokerage to brokerage.

Dealer

A dealer is a person or firm in the business of buying and selling securities for their own account, whether through a broker or otherwise. A dealer is defined by the fact that it acts as a principal in trading for its own account, as opposed to a broker who acts as an agent in executing orders on behalf of its clients. A dealer is also distinct from a trader in that a dealer buys and sells securities as part of its regular business, while a trader buys and sells securities for his or her own account but not on a business basis.

Behavioral Finance

A field of finance that proposes psychology-based theories to explain stock market anomalies. Within behavioral finance, it is assumed that the information structure and the characteristics of market participants systematically influence individuals' investment decisions as well as market outcomes.

Limit Order

A limit order is a take-profit order placed with a bank or brokerage to buy or sell a set amount of a financial instrument at a specified price or better; because a limit order is not a market order, it may not be executed if the price set by the investor cannot be met during the period of time in which the order is left open. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

Primary Market

A primary market issues new securities on an exchange for companies, governments and other groups to obtain financing through debt-based or equity-based securities. Primary markets are facilitated by underwriting groups consisting of investment banks that set a beginning price range for a given security and oversee its sale to investors

Short selling

A short sale order, or a stock sold short, is an order to sell shares that a client does not own. As a result, the trader must borrow the stock from an existing client, sell the shares of the security and then buy the stock again to replace the shares he borrowed. In doing this, there are three rules that must be followed: A short sale order can only be done in what is known as an "up market" where the market is appreciating, not declining. This is known as the uptick rule. If a dividend is paid on the shares, the investor selling the shares short pays the dividend to the investor he borrowed the shares from. An investor cannot borrow shares to sell short without providing some sort of collateral

Specialist

A specialist is a member of a stock exchange who acts as the market maker to facilitate the trading of a given stock. The specialist holds an inventory of the stock, posts the bid and ask prices, manages limit orders and executes trades. If there is a large shift in demand on the buy or sell side, the specialist steps in and sells off his own inventory as a way to manage large movements and to meet the demand until the gap between supply and demand narrows.

Stock Index

A stock index or stock market index is a measurement of a section of the stock market. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.

Stop Loss Order

A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price. Stop loss orders are designed to limit an investor's loss on a position in a security. Although most investors associate a stop-loss order with a long position, it can also protect a short position, in which case the security gets bought if it trades above a defined price.

Syndicate

A syndicate is a temporary professional financial services alliance formed for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually. Syndication allows companies to pool their resources and share risks. There are several different types of syndicates, including underwriting syndicates, banking syndicates and insurance syndicates.

Third Market

A third market consists of trading by non-exchange member brokers/dealers and institutional investors of exchange-listed stocks. In other words, the third market involves exchange-listed securities that are being traded over-the-counter between brokers/dealers and large institutional investors.

Tombstone

A tombstone is a written advertisement of a public offering placed by investment bankers who are underwriting the issue. It gives basic details about the issue and lists each of the underwriting groups involved in the deal. The tombstone provides investors with some general information and directs the prospective investors to a link where they can obtain a prospectus.

Level 1 quotes

A trading service that displays real-time bid/ask quotes and last sales for securities trading on a stock exchange. Level 1 quotes supply basic information that may suffice for most investors, but not for active traders. Such traders generally need the complete order book and market depth information that is offered by Level 2 quotes. Level 1 price quotes were a relative rarity before the advent of the Internet and online trading, but are now offered without charge by a number of financial portals and websites. Reliable Level 1 quotes aid investors in getting better prices for security purchases and sales, especially in fast-moving markets where investors may prefer limit orders rather than market orders.

Investment Bank

An investment bank (IB) is a financial intermediary that performs a variety of services. Investment banks specialize in large and complex financial transactions, such as underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial advisor for institutional clients. Major investment banks include Barclays, BofA Merrill Lynch, Rothschild , Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, UBS, Credit Suisse, Citibank and Lazard.

Market Order

An investor makes a market order through a broker or brokerage service to buy or sell an investment immediately at the best available current price. A market order is the default option and is likely to be executed because it does not contain restrictions on the price or the time frame in which the order can be executed. A market order is also sometimes referred to as an unrestricted order.

Arbitrage

Arbitrage opportunities exist when the prices of similar assets are set at different levels. This opportunity allows an investor to achieve a profit with zero risk and limited funds by simply selling the asset in the overpriced market and simultaneously buying it in the cheaper market.

Dutch Auction

If a company is using a Dutch auction initial public offering (IPO), potential investors enter their bids for the number of shares they want to purchase as well as the price they are willing to pay. For example, an investor may place a bid for 100 shares at $100 while another investor offers $95 for 500 shares. Once all the bids are submitted, the allotted placement is assigned to the bidders from the highest bids down, until all of the allotted shares are assigned. However, the price that each bidder pays is based on the lowest price of all the allotted bidders, or essentially the last successful bid. Therefore, even if you bid $100 for your 1,000 shares, if the last successful bid is $80, you will only have to pay $80 for your 1,000 shares.

Overconfidence

In business or trading, an overestimation of one's abilities and of the precision of one's forecasts. Overconfident people set overly narrow confidence intervals in making predictions. They tend to overweigh their own forecasts relative to those of others.

Breakout

In practice, a breakout is most commonly used to refer to a situation in which the price breaks above a level of resistance and moves higher. Once a resistance level is broken, it often becomes the next level of support when the asset experiences a pullback.

Anomalies

January effect, Day of the week effect

Level II quotes

Level II is essentially the order book for Nasdaq stocks. When orders are placed, they are placed through many different market makers and other market participants. Level II will show you a ranked list of the best bid and ask prices from each of these participants, giving you detailed insight into the price action. Knowing exactly who has an interest in a stock can be extremely

Limits to Arbitrage

Limits to arbitrage is a theory that, due to restrictions that are placed on funds that would ordinarily be used by rational traders to arbitrage away pricing inefficiencies, prices may remain in a non-equilibrium state for protracted periods of time. The efficient-market hypothesis assumes that whenever mispricing of a publicly traded stock occurs, an opportunity for low-risk profit is created for rational traders. The low-risk profit opportunity exists through the tool of arbitrage, which, briefly, is buying and selling differently priced items of the same value, and pocketing the difference.

Margin Trading

Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker. Since such use of financial leverage can potentially magnify gains but could also saddle the trader with devastating losses, leverage has the well-deserved reputation of being a double-edged sword. Because of the heightened risks of margin trading, it can only be conducted in a type of account known as a margin account, which differs from the regular cash account used by most investors. While stocks can be purchased either in cash or margin accounts, short sales can only be made in margin accounts; as well, certain instruments like commodities and futures can only be traded in margin accounts. Margin refers to the amount of funds that the trader or investor must personally put up from his or her own resources, and can vary widely depending on the asset or instrument.

Momentum

Once a momentum trader sees acceleration in a stock's price, earnings or revenues, the trader will often take a long or short position in the stock in the hope that its momentum will continue in either an upward or downward direction. This strategy relies on short-term movements in a stock's price rather than fundamental value.

Ask

The ask is the price a seller is willing to accept for a security, which is often referred to as the offer price. Along with the price, the ask quote might also stipulate the amount of the security available to be sold at the stated price. The bid is the price a buyer is willing to pay for a security, and the ask will always be higher than the bid

Inside quotes

The best bid and ask prices offered to buy and sell a security amongst the competing market makers. The inside quote is the prices at which at which market order will be executed. If it is a sell order, a market order will be executed at the inside bid price. For a buy order, it will be executed at the inside ask price.

Efficient Market Hypothesis

The efficient market hypothesis (EMH) is an investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and the only way an investor can possibly obtain higher returns is by purchasing riskier investments.

Fourth Market

The fourth market is a market that trades securities between institutions on a private, over-the-counter computer network, rather than over a recognized exchange such as the New York Stock Exchange (NYSE) or Nasdaq. Institutions can trade various types of securities and options. The fourth market is utilized by institutions only and can be compared to the primary market, secondary market, third market and dark pools. While primary, secondary and third markets have similar trading mechanisms and utilize similar technology as the fourth market, these markets are exchanges of publicly offered shares for all investors including retail and institutional.

Gambler's Fallacy

The gambler's fallacy, also known as the Monte Carlo fallacy or the fallacy of the maturity of chances, is the mistaken belief that, if something happens more frequently than normal during a given period, it will happen less frequently in the future.

Frame Dependence

The human tendency to view a scenario differently depending on how it is presented. Frame dependence is based on emotion, not logic, and can explain why people sometimes make irrational choices. For example, when presented with a scenario in which a sweater is being offered at its full price of $50 and a scenario in ...

Wisdom of Crowds

The idea that large groups of people are collectively smarter than even individual experts when it comes to problem solving, decision making, innovating and predicting. The wisdom of crowds concept was popularized by James Surowiecki in his 2004 book, The Wisdom of Crowds, which shows how large groups have made superior decisions in pop culture, psychology, biology, behavioral economics and other fields.

Support Level

The price level which, historically, a stock has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock. Often referred to as the "support level".

Weak Form EMH

The weak-form EMH implies that the market is efficient, reflecting all market information. This hypothesis assumes that the rates of return on the market should be independent; past rates of return have no effect on future rates. Given this assumption, rules such as the ones traders use to buy or sell a stock, are invalid.

Circuit Breakers

What is 'Circuit Breaker' Circuit breakers are measures approved by the SEC to curb panic-selling on U.S. stock exchanges and excessive volatility - large price swings in either direction - in individual securities. Also known as "collars," circuit breakers temporarily halt trading on an exchange or in individual securities when prices hit pre-defined tripwires, such as a 13 percent intraday drop for the S&P 500, or a 15 percent rise in a company's share price over five minutes.

Bubble and Crash

bubble occurs when investors put so much demand on a asset that they drive the price beyond any accurate or rational reflection of its actual worth. In the case of a stock, the actual worth would ideally be determined by the performance of the underlying company. Like the soap bubbles a child likes to blow, investing bubbles often appear as though they will rise forever, but since they are not formed from anything substantial, they eventually pop. A crash is a significant drop in the total value of a market, almost undoubtedly attributable to the popping of a bubble, creating a situation wherein the majority of investors are trying to flee the market at the same time and consequently incurring massive losses.