Knowledge
  Glossary
 

Advanced Computerized Execution System (ACES)
Computerized system, introduced in 1988, that allows market makers to automate executions and record-keeping.  Currently Nasdaq only supports ACES pass thru facility because SEC Order Handling Rules have made the use of ACES Autoexecution Service impractical.
After Hours Trading
Trading that occurs outside of regular trading hours 9:30AM - 4:00PM ET.  Most stocks trade much less volume after hours than during regular trading hours, exceptions can be stocks that announce news after the close.  Most after hours trading is done through ECNs.
Arbitrage
Dealing in two or more markets at the same time in the substantially identical assets (for example a stock and warrant on that stock) to take advantage of a temporary disparity in their prices.
Archipelago ECN (ARCA)
Launched in January 1997 as a joint venture between the founder of Terra Nova Trading and Townsend Analytics.  Located in Chicago.  Different from other ECNs because of use of algorithms (SmartBook) that actively look for the best price based on historical success rate and route orders there.  In 2000, it formed a partnership with the Pacific Exchange (PCX) to use its exchange status to trade NYSE stocks.  Often used by day traders.  Here is Archipelago web site.
Ask
The price at which a trader is willing to sell a security.  Also called an offer.  Also see Best Ask and Bid.
Attain ECN (ATTN)
A small ECN operated by a day trading firm All-Tech.  Here is Attain web site.
Auction Market
Market like NYSE where buyers and sellers enter competitive bids and offers and prices are determined by the interplay of supply and demand.
Automated Confirmation Transaction Service (ACT)
Automated service that speeds the post-execution steps of price and volume reporting, comparison, and clearing of trades completed on Nasdaq or OTCBB.  ACT also calculates last sale information and provides this data to Time & Sales tape.
Back testing
Testing a trading strategy based on historical data.  The trading strategy should be developed on earlier time period than that used for testing.
 
Bear market
A market in which the prices are falling.  Also see Bull market.
 
Best Ask
The lowest quoted ask among all the market participants.  This is the price at which a market buy order (as long as enough shares are offered and the ask is current) should be executed.  Also called inside ask or low ask  Also see Ask.
 
Best Bid
The highest quoted bid among all the market participants.  This is the price at which a market sell order (as long as enough shares are bid and the bid is current) should be executed.  Also called inside bid or high bid.  Also see Bid.
Beta
A measure of the volatility of a stock relative to the market.  A beta of more than 1 indicates a stock more volatile than the market. 
Bid
The price at which a trader is willing to buy a security.  Also see Best Bid and Ask.
Big Board
A common term for the New York Stock Exchange.
Block Trade
A transaction involving a large amount of a stock (commonly 10,000 shares or more) performed as a unit.  Since it may a long period of time for a dealer to accumulate enough shares for a block trade, block trades can often occur outside of current bid/ask spread.
Blue Chip
A company that is known nationally for its products and services, and is financially stable in good and bad economic times.
 
Bloomberg Tradebook ECN (BTRD)
ECN operated by Bloomberg.  Used mostly by institutional traders.  Began operations in December 1996 using Bloomberg name and its installed base of news/data/analysis systems as a leverage.  In 1999, it formed a partnership with Investment Technology Group (ITG) to develop SuperECN, a combination of Tradebook and ITG's POSIT (a stock-crossing system for institutional investors).  Here is its web site.
 
Bob Brinker
A host of the weekend financial talk show MoneyTalk and the author of a monthly investment newsletter Marketimer.  Brinker is a market-timer and claims to be able to predict market downturns by using his proprietary system (and alerting his newsletter subscribers to them) but hasn't yet proved to be able to do so.  His individual stock picks have been unspectacular.  Gets very defensive when callers question his ability.  His more general advice is usually very sound.  Bob Brinker discussion groups are here (Silicon Investor) and here (Suite101.com).  Here is his web site (ran by his son).
 
Broker-Dealer
A securities firm that is licensed to sell securities to the public.  Such firm can act of behalf of its clients to purchase or sell securities and can charge commission for those services.
 
BRUT ECN
An ECN mostly used by institutional investors.  Institutional investors can use BRUT through brokers.  BRUT is majority owned by Automated Securities Clearances (ASC) a division of SunGard Data Systems.  It began trading in May 1998.  In February 2000, it has completed a merger with a STRIKE ECN.  In April 2000, BRUT expanded into NYSE stocks through access to DOT.  BRUT's pricing is quite low: it rebates $0.10 per 100 shares up to $1.00 for orders entered that are then hit by another subscriber or by SelectNet, and charges $1.50-$4.00 per orders hit.  Here is BRUT web site.
 
Warren Buffet
America's second richest man, legendary value (and brand name) investor, and owner of Berkshire Hathaway (the highest priced stock due to not splitting).  Berkshire Hathaway stock has gone from $17.50 at the end of 1966 to $62,700 on August 4, 2000, significantly outperforming the S&P 500 index.  Buffet hasn't performed as well lately (losing 19.9% in 1999) because he doesn't invest in high-tech stocks which he says he doesn't understand.
 
Bull market
A market in which the prices are rising.  Also see Bear market.
 
Buy-side
Investing institutions like pension or mutual funds that engage in securities transactions.  Also see Sell-side.
 
Circuit Breakers
Limits on NYSE trading established in response to October 1987 and October 1989 market breaks.  The point drops or increases that trigger circuit breaks are set quarterly as a percentage of DJIA.  The collar triggered at a decline or increase of 2% limits arbitrage sell or buy orders on S&P 500 stocks. The collar triggered at a 10% decline halts trading for one hour if before 2 PM ET, or for 30 minutes if between 2 PM ET and 2:30 PM ET.  The collar triggered at a 20% decline halts trading for two hours if before 1 PM ET, or for one hour if between 1 PM ET and 2 PM ET, or for the remainder of the day if later.  The collar triggered at a 30% decline halts trading for the remainder of the day.  Nasdaq follows NYSE in halting trading. 

So far the only day when the trading was halted because of a decline was on October 27, 1997 due to a 7% decline (point values weren't adjusted to a percentage then).
 
Close Position
To get out of a position in a stock - to sell a long position or to cover a short position.
 
CNBC
U.S. cable TV channel which covers the market events during regular trading hours.  Two well-known CNBC reporters are Ron Insana and Maria Bartiromo.  Here is CNBC web site.
 
Abby Joseph Cohen
The managing director and chair of the Investment Policy Committee of Goldman Sachs, known for her bullishness.  The media has appointed her the leader of bulls because she has been bullish on the stock market since 1991.  In January 1998, she incorrectly predicted slower market returns, but in 1996 and later in 1998 she correctly advised her clients to stay in stocks during a correction.  Currently she remains bullish but is much more cautious.
 
Computer Assisted Execution System (CAES)
Nasdaq's automated order delivery execution system for exchange-listed securities.  It is Nasdaq's link to ITS.  CAES allows registered NASD member firms to make markets in listed securities.
 
Consolidated Quote System (CQS)
Computerized system that collects and displays quote data for listed stocks from all centers trading them.
 
Common Stock
Security that represent ownership and control of corporation.  When you buy stocks through a broker, this is the kind of stocks you get.  The common stocks of public companies trade on a stock exchange.  Common stockholders have greater control by electing a board of directors and having the right to vote during shareholders meetings and can receive dividends but assume greater risk and have rights to company's assets only after others.  Also see Preferred Stock.
 
Cover
To cover a position means to perform a buy transaction to close a short position.  Also see Short Sale.
 
Jim Cramer
Wall Street
commentator, hedge-fund trader and co-founder of TheStreet.com which fizzled after a spectacular IPO.  Cramer is TheStreet.com's chief columnist and makes frequent appearances on CNBC.  He's a fundamental trader. 
 
Crossed Market
A temporary situation which occurs when one market participant's bid is higher than another's ask.  Although knowingly entering such an order is against the rules, this situation can occur due to discrepancies in timing in times of heavy volume.
 
CUSIP
Committee on Uniform Security Identification Procedures number.  A unique, universally adopted, trademarked, nine-digit identifier assigned to a security used to expedite clearance and settlement and to track securities.

CUSIP was created in July 1964 by The American Bankers Association's Department of Automation after a Securities Procedures Committee established by the New York Clearing House Association concluded that a uniform securities identification system was feasible and timely.  The numbering system was chosen so that the number would contain as few characters as possible and it would be linked to an alphabetic sequence of issuer name.  First six digits of a CUSIP number uniquely identify the issuer and have been assigned to them in alphabetic sequence, the next two characters can be letters of digits and they identify the issue (10 for stocks, 01 for options), the ninth character is the check digit used to validate the accuracy of the whole number.

Here is CUSIP Service Bureau web site.  To request a CUSIP number, use the from on this web site.  To access the real-time CUSIP database over the Internet, use this recently create web site. 
 
Day Order
An order that is automatically cancelled (if not filled) at the end of the trading day.  Also see Good-'Til-Cancelled Order.
 
Day Trading
Trading style of opening short-term positions and closing them the same day.  Classic day traders end the day flat (with no open positions).  Media sometimes lumps position traders that hold open positions for several days into that category.
 
Depth of Market
The number of shares of a stock that can be bought or sold without causing the price to move.
 
Derivative
A security whose value depends on an underlying asset, reference rate, or an index.  Trading a derivative instead of an underlying security can be used to increase possible return, or hedge risk.
 
Diversification
Spreading investments among a wide variety of companies in different fields thus minimizing the impact of one security's decline on the portfolio.  Lately many people take diversification to the extreme by owning many mutual funds, with a negative impact on their portfolios' performance.
 
Dividend
The payment designated by the company's board of directors to be distributed among the shareholders.  High-growth companies often don't pay dividends.
 
Dollar Cost Averaging
A system of buying a fixed dollar amount of a stock at regular intervals, regardless of the share price.  More shares are bought when the price is lower and fewer when it's higher.  Dollar Cost Averaging (DCA) reduces the risk of choosing a wrong time to get into a stock because it results in lower average cost than the average price of the stock during that period.

DCA isn't a good strategy to use when you have the money already available because stocks tend to rise in price and not investing when you can will decrease your potential gains, but it is useful from the psychological point of view.  Many mutual funds and companies with dividend reinvestment plans let people use automatic investment plans that invest the same amount of money each month or quarter.
 
Downtick
Depending on the exchange, either a transaction that occurs at a price lower than the previous transaction, or lowering the bid or ask.  Also see Uptick.
 
Dow Theory
Oldest technical market-timing system still used today (dating from 1902-1926 WSJ editorials and "The Stock Market Barometer" book by William Peter Hamilton).  It states that if both the Dow Jones industrial and the Dow Jones transportation averages are rising, the market will continue rising.  But if the averages diverge, the market may fall.  It was given a new respect after "The Dow Theory: William Peter Hamilton's Track Record Reconsidered" article in the Journal of Finance in 1998.  Richard Russell publishes Dow Theory Letters.

ECN
Electronic Communications Network.  ECNs are computerized matching systems that compete with market makers for business on NASDAQ.  Using an ECN, a trader can advertise his bid or offer or perform a trade without using a market maker.  Currently operating ECNs are Archipelago, Attain, Bloomberg Tradebook, BRUT, Instinet, Island, MarketXT, NexTrade, and Redibook.  In 1999 ECNs handled 30% of NASDAQ volume.  Also see Market Maker.
 
Fill or Kill (FOK)
A type of order, available only through some brokers, which instructs the dealer to either fill the order immediately in full or to cancel it.
 
Firm Quote
The NASD requirement that a market maker honor his displayed quote and execute an order from another broker/dealer at that quoted price up to the displayed size.
 
Floor
The area of an exchange where securities are traded.  The NYSE floor measure 37,000 square feet.
 
Floor Trader
A member of an exchange who trades on the floor for his own account.
 
Al Frank
The author of the Prudent Speculator monthly newsletter which is know for using margin for its portfolio for its entire existence.  Frank correctly issued a buy signal after the 1987 crash.  Here is his web site.
 
Front Running
A practice of taking a position in a security to take advantage of an otherwise unknown large upcoming transaction of which the trader is aware.
 
Fundamental Analysis
The attempt to predict future price of a stock based on economic factors affecting the company.  Also see Technical Analysis.
 
Gap
The term used when the price of a stock jumps sharply without any trades occurring.  This happens most frequently when the stock opens next day after some important news was announced before the open or after the close.
 
Elaine Garzarelli
A stock market guru that won instant fame when she predicted the 1987 stock market crash and 1990 bear market.  Uses sector analysis.  In a 1989 TV appearance, she recommended her firm's own stock.  Became bearish again 1996 (turned out to be wrong).  Is bearish again in the year 2000.  Here is her web site.
 
Good-'Til-Cancelled Order (GTC)
Customer's order to buy or sell securities that remains open until it is either executed or cancelled.  Also see Day Order.
 
Benjamin Graham
Known as the father of value investing.  Together with David Dodd, wrote a classic Security Analysis in 1934 which defined value investing, later espoused by Buffet, Walter Schloss, and Bill Ruane.  Between 1929 and 1956 (includes the Great Depression) his investments grew at about 17% a year.
 
Joe Granville
Was the best-known investment letter writer in 1980 but his record has been very weak since.
 
Alan Greenspan
The Federal Reserve Board Chairman since August 11, 1987.  Also serves as Chairman of the Federal Open Market Committee.  Many credit him with the sustained growth of the U.S. economy. 
 
Hedging
The purchase or sale of a related security in order to reduce the risk of holding a security. 
 
Imbalance of Orders
A situation in which the number of buy orders for a stock greatly outnumber the number of sell orders for a stock or vice-versa.  This situation can result in a delayed stock opening or suspended trading.
 
Initial Public Offering (IPO)
First issue of stock to the public by a once private corporation to transform itself into a publicly held one. 
 
Inside Market
The best bid and the best ask of an issue at any time.
 
Instinet ECN (INCA)
The oldest and biggest ECN.  Launched in 1969.  Began allowing broker-dealers to subscribe to its network in the 1980s.  Owned by Reuters Group PLC.  Operates around the clock and is truly global.  For a long time Instinet allowed only carefully picked institutional investors to access its system, but it recently made moves, in response to growing market share of other ECNs like Island, to allow access to some retail traders through a partnership with E*Trade.  Recently it took a minority stake in Archipelago ECN.  Here is Instinet web site.
 
InterMarket Trading System (ITS)
An electronic network linking nine major U.S. markets operated by the Securities Industry Automation Corporation (SIAC).  It enables market participants to interact with each other to access the best price.  It was inaugurated in 1978, NASD joined in 1982.
 
Island ECN (ISLD)
Second largest and second oldest ECN.  Founded in 1996, it was included in Nasdaq quote montage in January 1997.  Grew from a day trading system, Watcher.  85% owned by Datek and used for its Nasdaq trades.  Initially embraced by day traders who valued its speed, liquidity, and quick adoption of new trading rules.  Now attracts many sell-side firms.  Island provides free access to its order book on the Internet (several other ECNs now followed its lead).  Here is Island web site.
 
Joint Account
An account that is owned by two or more people.
 
Level I
Basic quote service that shows current bid, ask, last price, and volume data.  Real-time Level I data is now offered for free by several web sites.
 
Level II
More complex display of bids and offers of all market makers' and ECNs' bids and offers.  Usually the bids are displayed on the left side and offers on the right side.  The prices are sorted and price levels are colored.  With the common availability of this data to all traders who want it, it has become much less valuable in predicting market moves but can still be useful in obtaining the best execution.
 
Level III
Similar to a Level II display but allowing a market maker to enter his quotes.
 
Limit Order
Order to execute the trade at a specific price or better.  Also see Market Order.
 
Liquidity
The ability of stock or a market to absorb a large amount of buying or selling without dramatic price movements.
 
Peter Lynch
The manager of Fidelity's flagship Magellan Fund from 1977 to1990.  During that time, he produced an annual return of 29%, 13% better than the market.  Lynch wrote a bestseller One Up on Wall Street where he explains his strategy of investing in companies you're familiar with.
 
Margin
Using money borrowed from a broker/dealer to buy securities (buying on margin).  Whether a stock can be bought on margin depends on the FED.
 
Margin Account
A brokerage account that allows its customers to borrow cash to purchase securities.  The current rate is 50%.
 
Margin Call
A demand upon a customer by a broker to deposit cash or marginable securities that occurs when the purchase is made and when the margin account's equity falls below minimum maintenance requirements.  If the margin call is not satisfied, the broker will have to liquidate a part of the position.
 
Market Maker
One of over 500 NASD member firms that is licensed to post and perform orders.  Market makers compete with each other and with ECNs for customer order flow (institutional or retail or both) by guaranteeing to buy and sell a given number of shares at a given price.  Also refers to a human trader that is performing this job.  Nasdaq is the only major exchange in the world that uses market maker system.  Use this form to find active market makers in a stock.  Also see ECN.
 
Market Order
Order to buy or sell as quickly as possible at the current price.  On Nasdaq this almost always means buying at the current inside ask and selling at the current inside bid.  This type of order can be risky because of the uncertainty of the price received.  Most brokers don't allow market orders after hours.  Also see Limit Order.
 
Market Timing
An attempt to predict market downturns in order to stay out of the market at those times or reducing market exposure.  Market timers haven't proved to be particularly successful.  An example of a market timer is Bob Brinker.
 
MarketXT ECN (MKXT)
A very small ECN to be acquired by Tradescape.com (deal announced in February 2000 for $100 million).  Began operating in 1999.  Here is its web site.
 
Michael Metz
A long-time bear and a former Oppenheimer fund manager (got fired in 2000).  Used to have a lot of TV exposure.
 
Momentum Investing
The technical analysis strategy of buying stocks that have a strong upward price trend.  This strategy can be dangerous during a market downturn as these kinds of stocks tend to be punished heavily.
 
Motley Fool
A web site created by David and Tom Gardner.  Motley Fool runs several model portfolios but their results are not representative of how an investor would do, because the Fools simply discontinue and forget about portfolios that under-perform.  The Fools preach long-term investing yet they analyze daily action in great detail.
 
Nasdaq
National Association of Securities Dealer Automated Quotations system.  A stock exchange operated by NASD that is known for its high-tech listings and a market maker system.  Most day traders prefer to trade on Nasdaq over NYSE because of the speed of executions and quote updates.  Here is Nasdaq web site.
 
NASD
National Association of Securities Dealers.  The self-regulatory organization responsible for the Nasdaq stock market and the over-the-counter markets.  Here is NASD web site.
 
New York Stock Exchange (NYSE)
The oldest and largest stock exchange in the U.S.  Founded in 1792 by 23 brokers.  Its most recognizable symbols are the trading floor located in New York and the opening and closing bell.  NYSE is an auction market that uses a specialist system.  Here is NYSE web site.
 
NexTrade ECN (NTRD)
A small privately held ECN launched in November 1998.  Its customers are Brown & Co. and Dreyfus Brokerage Services.  In January 2000, NexTrade filed application to become a for-profit stock exchange.  Here is its web site.
 
Odd Lot
Order of less than 100 shares of a stock.  Odd lots are not represented in the quote montage and therefore may experience inferior executions.  Also see Round Lot.
 
Odd Lot Theory
An investment strategy assuming that odd lot trades are done by small investors who are usually wrong about the market or stock direction.  This strategy was proven to be rather unsuccessful.
 
OptiMark
A patented system for institutional traders allowing them to anonymously represent their trading interests across a spectrum of prices and sizes and providing matching of those multi-dimensional profiles.  Matching cycles, in which user profiles and trades are considered to provide the highest satisfaction values, occur for Nasdaq from 9:45 AM ET to 3:45 PM ET.  Here is the web site of the makers of this system.
 
OTC Bulletin Board (OTCBB)
A quotation system for over-the-counter (OTC) securities operated by NASD since it started in 1990.  Over 6,500 securities trade on OTCBB.  They are often referred to as penny stocks.  OTCBB does not impose listings standards, there are no automated execution systems, and there are fewer requirements on market makers.  Those differences make the possibility of the scams much greater than on Nasdaq or NYSE.  Here is OTCBB web site.
 
Overbought
A technical analysis term referring to a stock or a market that has risen to an unreasonable level and that only sellers are left.  Also see Oversold.
 
Oversold
A technical analysis term referring to a stock or a market that has declined too far and should start to rise.  Also see Overbought.
 
Paper Trading
Simulated trading on paper (or on a computer) to practice trading without any risk or to test a trading system. 
 
Pink Sheets
Daily listings printed by National Quotations Bureau on a pink paper containing market maker quotes for over-the-counter securities not listed on any major market.  They are published for brokers and market makers, not for general public.  Most companies listed on Pink Sheets are very small, are thinly traded, and have small outstanding volume.  Some of them are of questionable quality and it is hard to obtain information about them because Pink Sheets issuers do not have any filing or reporting requirements.

Many companies joined the ranks of Pink Sheets companies when the SEC approved OTCBB Eligibility Rule in 1999 and NASD de-listed over 3,000 companies from the OTC Bulletin Board.  In September 1999, Pink Sheets LLC allowed market makers and brokers to access real-time quotes for over 4,800 OTC securities over the Net.  Free delayed quotes for these companies are expected to follow soon.
 
Preferred Stock
A type of stock that pays a fixed dividend regardless of company profits, and which has a priority of common stock dividends.  It carries no voting rights.  It has preference over common stock in the event of liquidation. 
 
Program Trading
Computerized trading strategy involving buying or selling 15 or more stocks having a total market value of $1 million or more.  The program can monitor different markets and securities and issue buy and sell signals when index arbitrage or other trading opportunities are detected.  NYSE collects program trading statistics daily.
 
Qualitative Analysis
Determining the value of the stock by looking at subjective, non-numeric characteristics of a company like management expertise, employee morale, labor relations, customer loyalty, brand value, or strength of R&D.  Also see Quantitative Analysis.
 
Quantitative Analysis
Determining the value of the stock by looking at company's numeric characteristics like its financial ratios, assets, liabilities, profits, margins, market share and trends in these data.  Also see Qualitative Analysis.
 
Qualitative Analysis
Determining the value of the stock by looking at subjective, non-numeric characteristics of a company like management expertise, employee morale, labor relations, customer loyalty, brand value, or strength of R&D.  Also see Quantitative Analysis.
 
Quantitative Analysis
Determining the value of the stock by looking at company's numeric characteristics like its financial ratios, assets, liabilities, profits, margins, market share and trends in these data.  Also see Qualitative Analysis.
 
Random Walk Theory
An investment theory that states that market prices follow a random path and are unpredictable.  It supposes that market is efficient and that any strategy that works will be soon discovered and made unprofitable.  "A Random Walk Down Wall Street," written by Burton Malkiel in 1973, states that technical and fundamental analysis are a waste of time and that large transaction costs will outweigh any profits. 
 
REDIBook ECN (REDI)
Started operation in November 1997.  Operated by an impressive consortium of Wall Street firms.  It offers proactive order matching through SelectNet.  Here is its web site.  REDIBook's order book is available for free over the Internet.
 
Regulation T
FED regulation governing  the extension of credit to the clients of brokers for the purchase of securities.
 
Round Lot
Order of a multiple of 100 shares.  Also see Odd Lot.
 
SEC Fee
A small fee (1/300 of 1% of the total amount of securities sold, will be lowered to 1/800 of 1% in 2007) added to transaction costs on sales of securities.
 
SEC Order Handling Rules
Rules adopted by the SEC on August 28, 1996 and implemented January 20, 1997 to provide investors with greater limit-order protection and improved access to market information.  Caused investors' limit orders to be displayed to the whole market, improving their execution, and added ECN orders to the quote montage.
 
SelectNet
A message-passing system ran by Nasdaq.  It offers the market participants the ability to electronically negotiate and execute trades.  Users are able to direct orders to a specific market maker or an ECN (preference) or to broadcast orders to all market participants.  Transactions are automatically reported to Nasdaq.  Here is SelectNet user guide.  Also see SOES.
 
Sell-side
Retail or institutional brokers and traders that engage in securities transactions.  Also see Buy-side.
 
Settlement Date
The date at which the security should be delivered between securities firms after the trade.  Usually three days.
 
Sharpe Ratio
The formula developed by Nobel Laureate Bill Sharpe that quantifies the fund's historical risk-adjusted performance.  It is calculated by taking fund's returns in excess of a guaranteed investment and dividing it by the standard deviation of these returns:
Sharpe Ratio = (Rfund - Rguaranteed) / standard_deviation

The standard deviation is calculated (not just for this formula, but in general) as:
standard deviation = \/¯(Sumi=1n((Ri - Rmean)2) / (n-1)), where
Ri = return in the individual time period,
Rmean = mean return over all time periods (Sumi=1n(Ri ) / n), geometric mean can be better - see the note below
n = number of time periods

For example, let's calculate the Sharpe Ratio for a fund that has returned 7.6%, 2.0%, -8.1%, 1.4%, 5.7%, -3.9%, and 2.3% from January to July.  The number of time periods, n, is 7.
Let's use Treasury bills as a guaranteed investment.  If the T-bill returned 4.9% per year, it has returned about 0.4% per month.

Rmean = (7.6 + 2.0 + (-8.1) + 1.4 + 5.7 + (-3.9) + 2.3) / 7 = 1.0
standard deviation = \/¯(((7.6-1.0)2 + (2.0-1.0)2 + (-8.1-1.0)2 + (1.4-1.0)2 + (5.7-1.0)2 + (-3.9-1.0)2  + (2.3-1.0)2 ) / (7-1)) = \/¯(175.32 / 6) = 5.41
Sharpe Ratio = (1.0 - 0.4) / 5.41 = 0.111

When choosing among similar funds, it makes sense to choose the one with the highest Sharpe Ratio.  However, there are some issues which Sharpe Ratio doesn't address.  The basic one is that the formula assumes that volatility is a good measure of risk.  This is a debatable assumption, for example it penalizes upside volatility the same as downside volatility and it doesn't add any extra penalty for consecutive losses.  Another problem is the use of the arithmetic mean to determine the average rate of return - this can lead to overestimating the return.  The solution is to use a geometric mean.  For our example:
Rmean = (1.076 * 1.020 * 0.919 * 1.014 * 1.057 * 0.961 * 1.023)1/7 - 1 = 0.87%
Sharpe Ratio = (0.87 - 0.4) / 5.41 = 0.087
It is important to note that this and other similar measures assume that historic results have some predictive ability. 
 
Short Sale
A trading strategy where a trader sells a stock that he doesn't own (the stock is borrowed from a trader holding a long position in the stock) in anticipation of a price drop.  A short position has an unlimited loss potential if the stock's price increases.  Selling short is only allowed on an uptick (except for market makers).  Also see Cover.
 
Short Squeeze
A situation when stock price rises pressuring investors with short positions to cover and raise the price even further.
 
SOES
Small Order Execution System.  A system made mandatory (for NMS securities) after the 1987 crash to provide automatic order execution for individual traders' small orders (less or equal to 1000, 500, or 200 shares depending on the stock).  Market makers must accept SOES orders and they can set their workstations to automatically update quotes after an SOES execution.  ECNs are not SOES-able.  Here is SOES user guide.  Also see SelectNet.
 
George Soros
Hedge fund manager, born in Budapest, Hungary.  His Quantum Fund is generally recognized as having the best performance record of any investment fund during its first 26 years of history.  Quantum made its money by anticipating economic shifts around the world.  In 2000, the fund has dropped 20% and Soros decided to shift its focus to take less risks.  Soros is also known for his philanthropy.  See this web site for more info.
 
Specialist
Trader on the floor of the NYSE who is in charge of maintaining a fair and orderly trading in a stock.  Each NYSE stock has a specialist assigned to it.  Specialists are required to utilize their inventories when there is an imbalance of buyers and sellers but they can also trade for their own account.  Here is NYSE's own description of the role of specialists.
 
Spiders (SPDR)
Standard & Poor’s Depositary Receipts.  Trade like a stock under a symbol SPY on AMEX and are designed to approximate the performance of the S&P 500 Index.  Several newer similar instruments are also popular: Nasdaq-100 Index Tracking Stock (QQQ), MidCap SPDRs (MDY), diamonds based on the DJIA (DIA).  Other Index Shares are listed here.
 
Spread
Difference between bid and ask.  The spread is determined by a number of factors like the average volume of the stock, current trading interest in the stock, and the float of the stock.  It is possible to "split" the spread by placing a limit order at a price between the spread (to buy at a price higher than the current best bid or to sell at a price lower than the current best ask).
 
Stock Symbol
A unique identifier assigned to each security.  NYSE and AMEX stocks have 1-3 letter symbols.  4-5 letter symbols are assigned to NASDAQ securities.  The fifth letter identifies a special status of the stock.  The fifth letter represents (according to NasdaqTrader web site): A - Class A B - Class B C - The issuer has been granted a continuance in Nasdaq under and exception to the qualification standards for a limited period.
 
D - New
E - Delinquent in required filings with the SEC
F - Foreign
G - First convertible bond
H - Second convertible bond, same company
I - Third convertible bond, same company
J - Voting
K - Nonvoting
L - Miscellaneous situations, such as depositary receipts, stubs, additional warrants, and units
M - Fourth preferred, same company
N - Third preferred, same company
O - Second preferred, same company
P - First preferred, same company
Q - Bankruptcy Proceedings
R - Rights
S - Shares of beneficial interest
T - With warrants or with rights
U - Units
V - When-issued and when distributed
W - Warrants
Y - ADR (American Depositary Receipt)
Z - Miscellaneous situations such as depositary receipts, stubs, additional warrants, and units.
 
SuperDot
Super Designated Order Turnaround System.  Used by NYSE to transmit member firms' orders through the common message switch to the proper trading floor workstation. Specialists receiving orders through SuperDot execute them in the trading crowd at their posts and return reports to the originating firm's offices via the same electronic circuit that brought them to the floor. 
 
Systematic Risk
Risk that is common to an entire class of securities and cannot be eliminated by diversification.  Also called market risk.
 
Technical Analysis
The attempt to predict the future price of a stock based on the price and volume trends.  Also see Fundamental Analysis.
 
John Templeton
Famous manager of international mutual funds.  Considered the third best performing investment professional after Buffet and Lynch.  One of his rules is "buy when pessimism is at its maximum."  The Franklin Templeton funds web site is here.
 
Trading Halt
The temporary suspension of trading in a security, usually to disseminate news.  Trading halt can also be imposed by the exchange or the SEC for regulatory reasons.
 
Trin
A technical analysis short-term trading indicator calculated as follows: ((number of advancing issues / number of declining issues) / (up volume / down volume)).  A value of less than 1 is considered bullish.  Also called Arms Index.
 
Triple Witching Hour
The last hour of trading on the third Friday of March, June, September and December when stock options, stock index options, and stock index futures expire simultaneously.  It is often characterized by heavy volume and volatility.
 
Uptick
Depending on the exchange, either a transaction that occurs at a price higher than the previous transaction, or increasing the bid or ask.  Also see Downtick.
 
Volatility
The measure of price swings of a security or an index.  Also see Beta.
 
Volume
The total number of shares of a stock traded in a day.
 
Wash Sale Rule
IRS rule (see IRS publication 550) prohibiting a taxpayer from claiming a loss on a sale of a security if it is repurchased within 30 calendar days before or after the the sale date.  This rule also applies to short sales.  It is meant to prevent a person from claiming a loss for tax purposes and then buying it back right away (it applies only to losses).  Wash sale rule also applies to other "substantially identical securities" like options on that stock and .  This disallowed loss is added to the basis of the replacement security so that you don't lose the benefit of the disallowed loss.

Qualifying traders who elect mark-to-market tax treatment are not subject to the wash sale rules.  Having "trader" status with the IRS and electing mark-to-market treatment are complex complex issues that are subject to constant modifications so you should consult your tax advisor about them.
 
Zero-Sum Game
A game in which one player gains only if another player loses.  The net result is 0.  Options are a zero-sum game, stock market isn't.

Acronyms

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