Securities Definitions

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    The following are a series of terms that you, as an investor, might find useful in your investing experience: 

    After-Hours Trading 

    After-hours trading refers to stock trading outside the traditional trading hours of the major exchange, such as the New York Stock Exchange and the Nasdaq Stock Market.  The traditional or regular trading hours have been for some time from 9:30 a.m. to 4:00 p.m. Eastern Time. 

    Trading outside these regular hours is not a new phenomenon.  But it has generally been limited to high net-worth investors and institutional investors, such as mutual funds.  The emergence of private trading systems, known as Electronic Communications Networks, or ECNs, has allowed individual investors to participate in after-hours trading. 

    While after-hours trading promises greater opportunities and convenience for individual investors, it also involves significant risk.  The after-hours market can be much more volatile and far less liquid.  Before considering an after-hours trade, be sure to educate yourself about the risks.
     

    Day Traders 

    Day traders rapidly buy and sell stocks throughout the day in the hope that their stocks will continue climbing or falling in value for the seconds to minutes they own the stock, allowing them to lock in quick profits.  Day trading is extremely risky and can result in substantial financial losses in a very short period of time.
     

    Dividend 

    The part of the net earnings, or profits, of a corporation that is distributed to its stockholders.  Dividends are declared by the board of directors, usually at regular intervals.  In the U.S., they may be paid in bonds or stocks of a company, in notes or in cash.  Holders of preferred stock must be paid their dividends before anything is paid on common stock.  Businesses being terminated may issue liquidation dividends.
     

    Insider Trading 

    Buying and selling shares of stock or other securities based on special knowledge not available to others, such as information about new products not yet public.  Insider trading is illegal.
     

    Investment Banking 

    Investment banking is a mutual fund that invests in high-yielding, short-term money-market instruments, such as U.S. government securities commercial paper, and certificates of deposit.  Returns of money-market funds usually parallel the movement of short-term interest rates.  Some funds buy only U.S. government securities, such as Treasury bills, while general-purpose funds invest in various types of short-term paper.  They became enormously popular with investors in the early 1980s because of their high yields, relative safety and high liquidity.  Much of the money-market growth came at the expense of banks and thrift institutions.  With the drop in interest rates in the late 1980s, many investors moved from money-market funds to stock mutual funds and other investments.
     

    Initial Public Offering (IPO) 

    IPO occurs when a company first sells its shares to the public.  The underwriters and the company that issues the shares control the IPO process.  They have wide latitude in allocating IPO shares.  The SEC does not regulate the business decision of how IPO shares are allocated. 

    While smaller or individual investors are finding it easier to buy IPO shares through online brokerage firms, they may still find it difficult to buy IPO shares for a number of reasons.  The IPOs of all but the smallest of companies are usually offered to the public through an "underwriting syndicate," a group of underwriters who agree to purchase the shares from the issuer and then sell the shares to investors.  Only a limited number of broker-dealers are invited into the syndicate as underwriters and some of them may not have individual investors as clients.  Moreover, syndicate members themselves do not receive equal allocations of securities for sale to their clients.  The underwriters in consultation with the company decide on the basic terms and structure of the offering well before trading starts, including the percentage of shares going to institutions and to individual investors.  Most underwriters target institutional or wealthy investors in IPO distributions.  Underwriters believe that institutional and wealthy investors are better able to buy large blocks of IPO shares, assume the financial risk and hold the investment for the long term.
     

    Money Market Funds 

    Type of mutual fund that invests in high-yielding, short-term money-market instruments, such as U.S. government securities, commercial paper, and certificates of deposit.  Returns of money-market funds usually parallel the movement of short-term interest rates.  Some funds buy only U.S. government securities, such as Treasury bills, while general-purpose funds invest in various types of short-term paper. 

    They became enormously popular with investors in the early 1980s because of their high yields, relative safety, and high liquidity.  Much of the money-market growth came at the expense of banks and thrift institutions.  With the drop in interest rates in the late 1980s, many investors moved from money-market funds to stock mutual funds and other investments.
     

    Online Trading 

    Although you may save time and money trading online, it does not take the homework out of making investment decisions.  To avoid costly mistakes, investors who trade online should understand how our securities markets work and their options in placing trades in fast-moving markets when slow downs occur.  The Internet allows individuals or companies to communicate with a large audience without spending a lot of time, effort or money.  Anyone can reach tens of thousands of people by building an Internet Web site, posting a message on an online bulletin board, entering a discussion in a live "chat" room or sending mass e-mails.  It's easy for fraudsters to make their messages look real and credible.  But it's nearly impossible for investors to tell the difference between fact and fiction.
     

    Over the Counter 

    Method of buying and selling securities outside the standard.  The over-the-counter (OTC) market is composed of thousands of far-flung stock and bond dealers and brokers who negotiate most transactions by computer or telephone.  For the most part, dealers purchase securities for their own accounts and sell them at a markup.  Prices of many U.S. OTC issues are quoted on NASDAQ (National Association of Securities Dealers Automated Quotations), a computerized system.
     

    Program Trading 

    Program traders exploit price differences between stock-index futures and the stocks represented by such futures using sophisticated computer programs, simultaneously monitoring and making trades in the commodity and stock markets.  Program trading was widely blamed for the stock market crash on October 19, 1987.
     

    Short Selling 

    Short Selling in finance and commerce, form of speculation based on anticipation of a decline in the prices of securities and commodities.  Short selling occurs most frequently in connection with the sale of securities on stock markets.  In this type of transaction, a seller undertakes to deliver to a purchaser a number of shares of a stock at the price prevailing at the time of sale.  To effect the transaction, the seller, who does not actually possess the shares, borrows them from a broker, who receives a commission for services rendered.  Subsequently, the seller "covers" by buying shares and delivering them to the broker.  If the seller is able to buy at a lower price than he or she received, a profit is realized; conversely, if the seller finds it necessary to cover at a higher price, a loss is sustained.  The process of short selling on the commodity markets is similar.
     

    Speculation 

    Buying and selling such items as securities, commodities or land in the hope of sudden increases in their value and often with the risk of sudden decline.  Speculation, along with margin trading, is believed to be the cause of the infamous crash of 1929.