Accrual accounting
Recording revenue when earned and expenses when incurred, regardless of when cash moves. US GAAP financial statements use this basis.
See also GAAP
Trading and investing glossary
327 plain-English definitions, from accrual accounting to yield curves. Each one is the definition the AnkushAI Academy lessons use, with the lesson that teaches it.
A
Administrator
The official or agency that runs a state's securities act: it registers firms and individuals, makes rules, investigates and enforces.
Adverse opinion
An auditor's opinion that the financial statements do NOT present fairly. It's the most serious finding.
Agent
An individual who represents a broker-dealer or an issuer in effecting or attempting to effect securities purchases or sales. Only individuals can be agents.
All-or-none (AON)
An instruction to fill the entire order or none of it; unlike fill-or-kill, it can stay open.
Alpha
The return above (or below) what the investment's risk, usually its beta, says it should have earned.
See also Beta
American-style option
An option that can be exercised on any business day before expiration. All standardized U.S. stock and ETF options are American-style.
Annual report to shareholders
The report a company must send shareholders when it holds an annual meeting to elect directors. It's separate from the 10-K, though some companies send the 10-K itself.
See also Shareholder
Annualized return
A return restated as a yearly compound rate: (1 + R)^(12 ÷ months) − 1.
Ask
The lowest price a seller is currently willing to accept for a security.
See also Security
Assets under management (AUM)
For the federal/state split, the securities portfolios to which an adviser provides continuous and regular supervisory or management services.
Assignment
The notice that tells an option writer they must fulfill the contract because a holder exercised. Assignments are allocated to writers by OCC and then by the firm.
See also Option
At the money (ATM)
An option whose strike is equal to, or very close to, the current underlying price.
See also Underlying, Option
Audited financial statements
Statements an independent auditor has examined and given an opinion on, such as those in the 10-K.
Average true range (ATR)
A measure of how much a security typically moves per period, including gaps between periods.
See also Security
Averaging down
Buying more of a losing position to lower the average cost; it increases exposure to a trade that is going wrong.
B
Backtest
A historical simulation of exact trading rules, recording the P&L they would have produced on past data.
Balance of payments
A country's record of transactions with the rest of the world, split mainly into the current account and the financial account.
See also Current account
Balance sheet
A snapshot of what a company owns (assets), owes (liabilities) and the owners' stake (equity) at one point in time. Assets = liabilities + equity.
Basis point
One hundredth of a percentage point (0.01%). 100 basis points = 1%.
Best execution
A brokerage firm's duty to seek the most favorable terms reasonably available when executing customer orders.
Beta
How much a position tends to move per 1% move in a benchmark: correlation × (its vol ÷ benchmark vol).
See also Correlation
Bid
The highest price a buyer is currently willing to pay for a security.
See also Security
Bid-ask spread
The gap between bid and ask. It's a hidden cost: buying at the ask and selling at the bid loses the spread immediately.
Book value per share
Common shareholders' equity ÷ common shares outstanding.
See also Shareholders' equity
Books and records
The ledgers, memos, client agreements, communications and other documents a registrant must create and keep, and show to regulators on request.
Breakeven
The underlying price at expiration where a position neither makes nor loses money. Long call: strike + premium. Long put: strike − premium.
See also Underlying, Premium
Breakout
When price moves through a support or resistance zone and keeps going.
See also Resistance, Support
Brochure (Form ADV Part 2A)
The plain-English narrative an adviser gives clients describing its business, fees, conflicts and disciplinary history. Part 2B supplements describe the individuals.
Broker-dealer
Any person in the business of effecting securities transactions for others (as broker) or for its own account (as dealer). Banks, issuers and agents are excluded.
Budget deficit
When government spending is greater than revenue in a fiscal year. The US Treasury borrows to cover it by selling securities.
Business cycle
The recurring rise and fall of overall economic activity: expansion, peak, contraction and trough.
Business risk
The risk that a company's operations (its products, competition or management) fail to produce expected profits.
C
Call option
An option that gives the holder the right to BUY the underlying at the strike price before or at expiration.
Taught in What an option actually is
Cancellation
An Administrator's order ending a registration for housekeeping reasons, such as the registrant no longer existing or not being locatable. It is not a disciplinary sanction.
See also Administrator
Candlestick
A chart symbol showing a period's open, high, low and close, with a body (open to close) and wicks (high and low).
See also Wick
Capital structure
The mix of debt, preferred stock and common stock a company uses to finance itself.
See also Preferred stock, Common stock
Cash accounting
Recording revenue and expenses only when cash is actually received or paid.
Cash settlement
Settlement where exercise pays the in-the-money amount in cash instead of delivering shares. Most index options (SPX, XSP) are cash-settled.
Cash-secured put
Selling a put while setting aside enough cash to buy the shares at the strike if assigned.
Cease and desist order
An order from the Administrator telling a person to stop a violation, which it can issue with or without a prior hearing.
See also Administrator, Person
Closing auction
The process at 4:00 p.m. ET that sets a stock's official closing price.
See also Stock
Coincident indicator
A data series that moves at about the same time as the overall economy, such as payroll employment or industrial production.
Common stock
The residual ownership of a company: usually voting rights, and last in line in liquidation.
Compounding
Returns building on previous returns, so growth multiplies: start × (1 + r1) × (1 + r2) …
Consent to service of process
A filing that appoints the Administrator to receive legal papers on the registrant's behalf for suits under the Act. Filed once, it carries over to later registrations.
See also Administrator
Consumer Price Index (CPI)
A BLS measure of the average change over time in prices paid by consumers for a representative basket of goods and services.
Contract multiplier
How many units one contract covers. Most U.S. equity and ETF options cover 100 shares, so a $2.00 quote costs $200.
See also Option
Taught in What an option actually is
Contraction
The phase when economic activity is falling, running from a peak to a trough. A significant, widespread, lasting contraction is a recession.
Control person
Someone who directly or indirectly controls a firm, such as an officer, director or partner. Under the Act they can share civil liability for the firm's violations unless they prove they did not and could not reasonably know.
Correlation
A number from −1 to +1 measuring how consistently two return series move together; covariance divided by the product of their volatilities.
See also Covariance
Covariance
A measure of whether two return series tend to be above (or below) their averages at the same time.
Covered call
Owning 100 shares and selling one call against them. You collect premium but agree to sell the shares at the strike if assigned.
See also Premium
Credit risk
The risk that a borrower fails to pay interest or principal on time.
Credit spread
A spread you're paid to open (the option you sell is worth more than the one you buy). Max loss = width of strikes − credit.
See also Option
Crowding out
The idea that heavy government borrowing can push up interest rates and squeeze out some private borrowing and investment.
Currency appreciation
When a currency buys more of other currencies than before. Its opposite is depreciation.
See also Depreciation
Currency risk
The risk that exchange-rate moves cut the value of a foreign investment when converted back to the investor's home currency.
See also Exchange
Current account
The part of the balance of payments covering trade in goods and services, plus income and transfers with the rest of the world.
See also Balance of payments
Current assets
Cash and other assets expected to be turned into cash or used up within about a year, such as receivables and inventory.
Current liabilities
Obligations due within about a year, such as accounts payable and short-term debt.
Current ratio
Current assets ÷ current liabilities. A liquidity measure: can near-term assets cover near-term bills?
Custody
Holding client funds or securities, or having authority to obtain possession of them. It triggers the strictest safeguards and the highest net worth minimum.
D
Data snooping
Biasing results upward by testing many ideas on the same data and keeping the best; also called multiple-testing bias.
Day order
An order that expires at the end of the regular trading session if not filled. Orders are generally day orders unless you choose otherwise.
De minimis exemption
Relief from registering in a state where an adviser has no place of business and only a handful of clients: fewer than 6 (federal standard) or no more than 5 non-institutional clients (the Act) in 12 months.
See also Place of business
Debit spread
A spread you pay to open (the option you buy costs more than the one you sell). Max loss = the debit paid.
See also Option
Debt-to-equity ratio
A leverage measure comparing what a company owes to its shareholders' equity. It's commonly total liabilities ÷ equity, though some sources use only interest-bearing debt.
See also Shareholders' equity, Leverage
Defined risk
A position whose maximum possible loss is known and capped when you open it, such as a long option or a vertical spread.
See also Vertical spread, Option
Deflation
A general fall in the price level. It sounds nice, but it can feed weak demand and makes debts heavier in real terms.
Delta
The estimated change in an option's price for a $1 move in the underlying. Calls run 0 to +1, puts 0 to −1. Times 100 it's the share-equivalent exposure of one contract.
See also Underlying, Option
Depreciation
Spreading the cost of a long-lived asset over its useful life as an expense. It reduces profit but uses no cash in the period it's recorded.
Disclaimer of opinion
A report in which the auditor says it does not express an opinion, typically because it couldn't get enough evidence.
Discount rate
The interest rate the Fed charges eligible banks that borrow at its discount window. The main rate is the primary credit rate.
Discount rate (in valuation)
The rate used to shrink future cash flows back to today's value. It reflects the required return or opportunity cost. Not the same as the Fed's discount rate.
See also Opportunity cost, Discount rate
Taught in Time value of money: FV, PV, NPV and IRR
Discretion (discretionary authority)
Authority to decide what, how much, or when to buy or sell for a client without asking first.
Disinflation
Inflation that's still positive but slowing, for example from 6% to 3%.
See also Inflation
Diversification
Spreading money across investments that don't move in lockstep, to reduce unsystematic risk.
See also Unsystematic risk
Dividend
A cash payment some companies make to shareholders out of profits.
See also Shareholder
Downside deviation
The typical size of returns below a target (often 0%); only shortfalls count, upside surprises are ignored.
Drawdown
The decline from an account's peak to its lowest point before a new peak.
See also Peak
Dual mandate
Shorthand for the Fed's goals of maximum employment and stable prices. The statute also names moderate long-term interest rates.
E
Early assignment
Being assigned on a short American-style option before expiration. It's most likely when the option is deep in the money with little time value, or just before an ex-dividend date.
Earnings
A company's profit over a period. Quarterly earnings reports often move stock prices when results differ from expectations.
See also Stock
Earnings per share (EPS)
Net income available to common shareholders divided by the number of common shares outstanding.
See also Shareholder, Net income
EDGAR
The SEC's free public database of company filings such as 10-Ks, 10-Qs and 8-Ks.
Edge
A positive expected value per trade after costs, repeated over many trades.
See also Expected value
Effective exchange rate
A trade-weighted average of a currency's value against a basket of trading partners' currencies, such as the Fed's broad dollar index.
European-style option
An option that can be exercised only at expiration (in practice, on its expiration date). Most U.S. index options, such as SPX, are European-style.
See also Expiration date, Option
Ex-dividend date
The first day a stock trades without the right to its next dividend. Buy (or exercise into) the shares before this date to receive it.
Excess kurtosis
Kurtosis minus 3, so a normal distribution scores 0 and positive values mean heavier tails.
Exchange
A regulated marketplace, such as the NYSE or Nasdaq, that matches buy and sell orders under its own rules.
Exchange rate
The price of one currency in terms of another, for example $1.10 per euro.
Exempt reporting adviser
An adviser exempt from SEC registration (for example, advising only private funds with under $150 million, or venture capital funds) that still files parts of Form ADV with the SEC.
See also Form ADV
Exempt security
A security that need not be registered because of who issued it or what it is, such as government, bank, or nonprofit securities. It stays exempt on every trade, but never from anti-fraud rules.
See also Security
Exempt transaction
A sale that need not be registered because of how or to whom it is made, such as an isolated non-issuer sale or a sale to an institution. Only that transaction is exempt.
Exercise
When the holder uses the option's right: buying (call) or selling (put) the underlying at the strike, or receiving cash for a cash-settled option.
See also Underlying, Option
Exercise by exception
OCC's procedure for expiring options: options in the money by at least the threshold (currently $0.01 for equity and index options) are exercised unless the clearing member instructs otherwise. Brokers may use different thresholds.
See also Option
Expansion
The phase of the business cycle when output, jobs and incomes are growing, running from a trough to the next peak.
Expectancy
A strategy's average result per trade: (win rate × average win) − (loss rate × average loss), often measured in R.
See also Win rate
Expected move
A rough one-standard-deviation price range implied by an option's IV: price × IV × √(days ÷ 365). It is an estimate, not a forecast or a promise.
Expected value
The probability-weighted average outcome: win rate × average win − loss rate × average loss.
See also Win rate
Expiration date
The date an option stops existing. After it, the holder has no rights and the option has no value.
See also Option
Taught in What an option actually is
Extended-hours trading
Trading before the regular session (pre-market) or after it (after-hours), usually with less liquidity and wider spreads.
See also Liquidity
Extrinsic (time) value
Everything in an option's premium above its intrinsic value. It pays for time and uncertainty and shrinks to zero by expiration.
F
False breakout
When price pushes through a level, then reverses back inside it, trapping traders who chased the move.
Fat tails
Extreme outcomes occurring more often than a normal distribution with the same volatility predicts.
See also Normal distribution, Volatility
Federal covered adviser
An investment adviser registered with the SEC. States cannot register it, but can require notice filings and fees, license its IARs who work in the state, and enforce anti-fraud rules.
See also Investment adviser, Notice filing
Federal covered security
A security that NSMIA placed under exclusive federal registration, such as exchange-listed stocks, registered fund shares and Rule 506 offerings. States may require notice filings but not registration.
Federal funds rate
The interest rate at which banks lend reserve balances to each other overnight. The FOMC sets a target range for it.
See also Range
Federal Open Market Committee (FOMC)
The Fed's 12-member monetary policy committee: the 7 Board governors, the New York Fed president and 4 rotating Reserve Bank presidents. It holds 8 scheduled meetings a year.
See also Monetary policy
Fill-or-kill (FOK)
An instruction to fill the entire order immediately or cancel all of it.
Financial risk
Risk created by how a company is financed, especially heavy debt that must be serviced whatever profits do.
FINRA
The Financial Industry Regulatory Authority: the self-regulatory organization for broker-dealers and their registered representatives, overseen by the SEC.
See also Broker-dealer
Fiscal policy
Government decisions about taxes and spending. In the US they're made by Congress and the President through budgets and tax laws.
Fixed-fractional sizing
Risking a set percentage of current account equity per trade; shares = (account × risk %) ÷ (entry − stop).
See also Current account
Flat yield curve
A curve where short and long yields are about the same, often a transition between normal and inverted.
Form 10-K
A public company's annual report filed with the SEC. It gives a full overview of the business and includes audited financial statements.
See also Audited financial statements
Form 10-Q
A public company's quarterly report filed with the SEC for each of the first three fiscal quarters. Its financial statements are unaudited.
Form 8-K
A 'current report' a public company files to announce major events. It's generally due within four business days of the event.
Form ADV
The registration and disclosure form for investment advisers, filed through IARD. Part 1 is regulatory data, Part 2 is the client brochure and supplements, Part 3 is Form CRS.
Form CRS
The relationship summary (Form ADV Part 3) that SEC-registered advisers with retail investors must prepare and deliver.
See also Form ADV
Form U4
The uniform application individuals file to register as agents or investment adviser representatives, including their employment and disciplinary history.
See also Investment adviser, Agent
Fractional Kelly
Betting a fraction (often ¼ to ½) of the Kelly fraction to cut drawdowns and protect against an overestimated edge.
Future value (FV)
What a sum invested today grows to at a given rate over a given time: FV = PV × (1 + r)^n.
Taught in Time value of money: FV, PV, NPV and IRR
G
GAAP
Generally Accepted Accounting Principles: the standard rules US companies follow to prepare financial statements.
Gamma
The estimated change in delta for a $1 move in the underlying. Highest for at-the-money options near expiration. Long options have positive gamma.
Gap
When a price opens well above or below the previous close, leaving an empty space on the chart.
Geometric mean return
The constant per-period return that compounds to the same total result; the honest average for returns.
Geopolitical risk
The risk that wars, sanctions, elections, trade disputes or political instability hurt markets and investments.
Good-'til-canceled (GTC) order
An order that stays open until it fills or you cancel it, subject to your firm's time limit.
Gross domestic product (GDP)
The market value of all final goods and services produced inside a country in a period. Measured in the US by the BEA.
H
Historical volatility
How much the underlying actually moved over a past period, measured as the annualized standard deviation of its returns.
See also Standard deviation, Underlying
Holder (long)
The buyer of an option. Holds the right and pays the premium. Being long an option means you own it.
Taught in What an option actually is
Howey test
The Supreme Court's 1946 test for an investment contract: an investment of money in a common enterprise with profits expected from the efforts of others.
See also Investment contract
I
IAR continuing education
NASAA's model requirement that IARs complete 12 credits a year: 6 in products and practice and 6 in ethics, with no carryover.
See also NASAA
IARD
The Investment Adviser Registration Depository, the electronic system advisers use to file Form ADV with the SEC and the states.
See also Investment adviser, Form ADV
Idiosyncratic risk
Risk specific to one company or asset that can be reduced by diversifying.
Immediate-or-cancel (IOC)
An instruction to fill whatever can be filled right away and cancel the rest.
Implied volatility (IV)
The volatility figure that, plugged into a pricing model, reproduces an option's market price. It is the market's priced-in estimate of how much the underlying may move, quoted as an annualized percentage.
In the money (ITM)
A call whose strike is below the stock price, or a put whose strike is above it. ITM options have intrinsic value.
In-sample
The data used to build and tune a strategy; results there are optimistic by construction.
Income statement
A report of revenues, expenses and profit over a period, such as a quarter or year.
Inflation
A general rise in the price level, which means each dollar buys less over time.
See also Mean
Institutional investor
An organization such as a bank, insurer, investment company, pension plan or broker-dealer. Many exclusions and exemptions in the Act turn on dealing only with institutions.
See also Broker-dealer
Interest on reserve balances (IORB)
The rate the Fed pays banks on balances they keep at the Fed. It's a key tool for steering the federal funds rate.
See also Federal funds rate
Interest rate risk
The risk that rising interest rates push down the value of existing investments, especially long-term bonds.
Internal rate of return (IRR)
The discount rate that makes a project's NPV exactly zero: its built-in annualized return.
See also Annualized return, Discount rate
Taught in Time value of money: FV, PV, NPV and IRR
Internalization
When a brokerage firm fills a customer's order from its own inventory instead of sending it to an outside venue.
Intrinsic value
The part of an option's price that is 'real' right now: how far it is in the money. Call: stock minus strike. Put: strike minus stock. Never below zero.
Inverted yield curve
A downward-sloping curve: short-term yields are higher than long-term yields. It has often come before US recessions.
See also Recession
Investment adviser
A person who, for compensation, is in the business of advising others about securities, or issues analyses or reports about securities as a regular business.
See also Person
Investment adviser representative (IAR)
An individual associated with an adviser who gives advice, manages accounts, decides what advice is given, solicits or sells advisory services, or supervises those who do.
Investment contract
A security defined by substance: money invested in a common enterprise with profits expected from others' efforts. It is the catch-all that captures new kinds of deals.
See also Security
Issuer
A person who issues or proposes to issue a security, such as a company selling its own stock.
IV crush
A sharp drop in implied volatility after a scheduled event (often earnings) passes, which cuts option prices even if the stock moves.
K
Kelly criterion
The bet size that maximizes the expected log of wealth (long-run growth); for a simple bet f* = p − (1 − p) ÷ b.
Kurtosis
A measure of how heavy a distribution's tails are relative to a normal distribution (normal = 3).
See also Normal distribution
L
Lagging indicator
A data series that tends to turn after the overall economy does, such as the average duration of unemployment.
Leading indicator
A data series that tends to turn before the overall economy does, such as building permits or initial jobless claims.
Legal/regulatory risk
The risk that new laws, regulations, lawsuits or enforcement hurt an issuer's value.
See also Issuer
Leverage
Controlling more market value than your own money, usually with borrowed funds. It magnifies gains and losses.
Limit order
An order to buy or sell at a set price or better. It controls price but may not fill.
Limit Up-Limit Down (LULD)
A single-stock mechanism that blocks trades outside a price band and pauses trading for five minutes if the price stays at the band for 15 seconds.
See also Stock
Liquidation priority
The order in which claims are paid if a company is liquidated: secured creditors, then unsecured creditors (subordinated debt after senior), then preferred stock, then common stock.
See also Preferred stock, Common stock
Liquidity
How easily you can trade a meaningful size without moving the price. Liquid stocks have tight spreads and deep quotes.
See also Stock
Log return
The natural log of end price ÷ start price; log returns add across time.
Look-ahead bias
A backtest error where a decision uses information that wasn't available at the time.
See also Backtest
M
Margin
Borrowing from your brokerage firm to buy securities, using your account as collateral.
Margin call
A demand to add cash or securities when account equity falls below the required level; the firm may also sell your securities.
Market capitalization
Shares outstanding × share price: the market's current price tag on the whole company.
Market maker
A firm that stands ready to buy and sell a security at publicly quoted prices, earning the spread and taking inventory risk.
See also Security
Market order
An order to buy or sell immediately at the best available price. Execution is very likely; the price is not locked in.
Market regime
A persistent market state with its own typical returns, volatility and correlations (e.g. calm trend, choppy range, stressed).
Market-wide circuit breaker
A halt of all U.S. stock trading triggered by S&P 500 declines of 7%, 13% or 20% from the prior close.
See also Stock
Maximum drawdown
The largest peak-to-trough percentage fall over a period.
MD&A
Management's Discussion and Analysis, the 10-K section (Item 7) where management explains the year's results in its own words.
Mean
The arithmetic average: the sum of the values divided by how many there are.
Median
The middle value when the data are sorted. For an even count, the average of the two middle values.
Mid price
The halfway point between bid and ask; a common reference for placing limit orders.
See also Limit order
Taught in Reading an options chain like a pro
Minimum net worth requirement
A financial floor for state-registered advisers under NASAA's model rule: $35,000 with custody, $10,000 with discretion only, positive net worth for large prepaid fees.
Mode
The value that appears most often in a data set.
Monetary policy
Central-bank actions that steer short-term interest rates, money and credit to pursue its goals. In the US that means the Federal Reserve and its FOMC.
See also Mean
Moneyness
Where the strike sits relative to the underlying price: in the money, at the money, or out of the money.
See also Underlying
N
NASAA
The North American Securities Administrators Association: the association of state, provincial and territorial securities regulators. It writes model laws and rules and develops the Series 65.
See also Administrator
National best bid and offer (NBBO)
The highest bid and lowest ask for a stock across all U.S. trading venues, consolidated into one quote.
See also Stock
National debt
The total amount the federal government has borrowed and not yet repaid, built up from past deficits.
Net income
Profit after all expenses, interest and taxes. The 'bottom line' of the income statement.
See also Income statement
Net present value (NPV)
The present value of all expected future cash flows minus the upfront cost. Positive NPV means the project earns more than the discount rate.
See also Discount rate, Mean
Taught in Time value of money: FV, PV, NPV and IRR
Nominal interest rate
The stated interest rate, before adjusting for inflation.
See also Inflation
Non-issuer transaction
A trade that is not directly or indirectly for the benefit of the issuer, typically one investor reselling to another in the secondary market.
See also Issuer
Normal distribution
The symmetric bell curve; about 68% of outcomes within one standard deviation of the mean and 95% within two.
See also Standard deviation, Mean
Normal yield curve
An upward-sloping curve: longer maturities yield more than shorter ones.
Notice filing
A filing a state may require from a federal covered adviser (or for some federal covered securities): copies of federal documents and a fee, instead of state registration.
See also Federal covered adviser
NSMIA
The National Securities Markets Improvement Act of 1996, which split regulation between the SEC and the states for advisers and created federal covered securities.
O
OCC (Options Clearing Corporation)
The clearinghouse for U.S. listed options. It stands between buyer and seller and assigns exercises to clearing members.
Offer
Any attempt to dispose of, or solicitation of an offer to buy, a security or an interest in one, for value.
See also Security
OHLC
Open, high, low, close: the four prices that summarize a period of trading.
Open interest
The number of contracts in a series that are still open (not closed or exercised). It updates once a day and says nothing by itself about bullish or bearish bets.
Taught in Reading an options chain like a pro
Open market operations
A central bank's purchases and sales of securities in the open market. Buying adds reserves to the banking system and selling drains them.
See also Sale
Opening auction
The process at 9:30 a.m. ET that matches orders gathered before the open into a single opening price.
Opportunity cost
The gain you give up by choosing one position over another. For a covered call, it's any rise above the strike.
See also Covered call
Option
A standardized contract that gives its buyer a right (not an obligation) to buy or sell an underlying asset at a set price until or on a set date. The seller takes on the matching obligation.
See also Underlying
Taught in What an option actually is
Options chain
The table of every listed strike for an underlying and expiration, showing bid, ask, volume, open interest, IV and often the Greeks for calls and puts.
Taught in Reading an options chain like a pro
Order book
The list of resting buy and sell orders at each price; the bid and ask are its top.
Out of the money (OTM)
A call whose strike is above the stock price, or a put whose strike is below it. OTM options have zero intrinsic value; their whole premium is extrinsic.
Out-of-sample
Data a strategy has never seen during development; the honest test of whether it works.
Overfitting
Tuning a model so closely to past data that it captures noise instead of a real, repeatable pattern.
Overtrading
Trading more often or larger than your plan calls for, often out of boredom or impatience.
P
Partial fill
When only part of an order executes and the rest stays open or is cancelled.
Pattern day trader
A former FINRA designation for margin customers making four or more day trades in five business days, with a $25,000 minimum. Replaced by intraday margin standards (effective June 4, 2026; phase-in to Oct 20, 2027).
Payment for order flow
Compensation a market maker pays a brokerage firm for routing customer orders to it.
See also Market maker
Payoff diagram
A chart of a position's profit or loss at expiration across possible underlying prices.
See also Underlying
Peak
The high point of economic activity, where an expansion ends and a contraction begins.
See also Contraction, Expansion
Person
Under the Act: an individual, corporation, partnership, association, joint-stock company, certain trusts, unincorporated organization, or government or political subdivision.
See also Stock
Physical delivery
Settlement where exercise means shares actually change hands at the strike price. U.S. stock and ETF options settle this way.
Pin risk
The uncertainty a seller faces when the underlying closes very near the strike at expiration: they can't be sure whether they'll be assigned.
See also Underlying
Place of business
Any office where an adviser regularly gives advice or meets, solicits or communicates with clients, plus any location held out to the public as one.
Position Greeks
A Greek multiplied by 100 shares and by the number of contracts (with a minus sign for short positions), giving the whole position's sensitivity.
Position size
How many shares you trade, calculated from your risk per trade and the distance to your stop.
See also Risk per trade
Position sizing
Deciding how much capital or risk to put on each trade.
Preferred stock
Equity with priority over common stock for dividends and in liquidation, but behind all creditors.
See also Common stock, Dividend
Premium
The price of an option, quoted per share. Multiply by the contract multiplier (usually 100) for the dollar cost.
See also Contract multiplier, Option
Present value (PV)
What a future amount is worth today, discounted at a given rate: PV = FV ÷ (1 + r)^n.
Taught in Time value of money: FV, PV, NPV and IRR
Price improvement
A fill at a better price than the current quote, for example buying below the ask. Possible, never assured.
Price-to-book ratio (P/B)
Share price ÷ book value per share: how the market price compares to the accounting value of equity.
See also Book value per share
Price-to-earnings ratio (P/E)
Share price ÷ earnings per share: how many dollars investors pay for each dollar of annual earnings.
See also Earnings
Principal office and place of business
The executive office from which a firm's officers, partners or managers direct, control and coordinate its activities.
Private placement exemption
Under the Act, an offer to no more than 10 non-institutional persons in a state in 12 months, with investment intent and no commission for soliciting them.
Protective put
Buying a put on shares you already own, so the put limits how much the shares can lose below the strike until expiration.
Purchasing power risk
The risk that inflation eats into the real value of an investment's returns. Fixed payments are hit hardest.
See also Inflation
Put option
An option that gives the holder the right to SELL the underlying at the strike price before or at expiration.
Taught in What an option actually is
Q
Qualified opinion
An auditor's opinion that the statements are fairly presented except for a specific matter the auditor describes.
Quick ratio
(Current assets − inventory) ÷ current liabilities. Some versions also subtract prepaid expenses. A stricter liquidity test, also called the acid-test ratio.
R
R-multiple
A trade's result expressed in units of its initial risk (R = entry minus stop). Stopped out = −1R; a gain of twice the risk = +2R.
Range
The highest value minus the lowest value.
Real GDP
GDP adjusted for price changes, so it measures changes in the quantity of output rather than in prices.
Real interest rate
The interest rate after inflation. Roughly nominal minus inflation; exactly (1 + nominal) ÷ (1 + inflation) − 1.
See also Inflation
Realized volatility
Volatility measured from actual past returns over a window (e.g. the last 20 trading days).
See also Trading days, Volatility
Recession
A significant decline in economic activity spread across the economy and lasting more than a few months (the NBER's definition). In the US, the NBER dates them.
Recovery gain
The percentage gain needed to get back to even after a loss: loss ÷ (1 − loss).
Registration by coordination
State registration of a security that is also being registered with the SEC; it becomes effective together with the federal registration once its conditions are met.
See also Security
Registration by filing
The NASAA-updated Act's registration method for seasoned issuers that meet size and history tests; often called registration by notification in older materials.
Registration by qualification
The full state review of a security; it becomes effective only when the Administrator orders it.
See also Administrator, Security
Regular trading hours
The main U.S. stock session: 9:30 a.m. to 4:00 p.m. Eastern Time.
See also Stock
Relative volume
Current volume divided by typical volume for the same period. 2 means twice the usual activity.
Rescission
Undoing a sale: the buyer returns the security and recovers the price plus interest, minus income received, plus costs and attorneys' fees.
Rescission offer
A seller's written offer to refund a buyer's money plus interest minus income. A buyer who still owns the security and does not accept within 30 days loses the right to sue.
Reserve requirement
The share of certain deposits a bank must hold as reserves. The Fed set it to 0% effective March 26, 2020.
Resistance
A price area where selling has been strong enough to stop rallies.
Revenge trading
Jumping back into trades after a loss to win the money back, usually bigger and with worse setups.
Reward-to-risk ratio
Potential profit to the target divided by potential loss to the stop.
Rho
The estimated change in an option's price for a 1-percentage-point change in interest rates. Usually the smallest Greek for short-dated options.
See also Option
Risk per trade
The amount of money you plan to lose if a trade hits its stop, often set as a small percentage of the account.
Risk-free rate
The return available without taking risk, usually a short-term Treasury bill yield.
Rule of 72
A shortcut: 72 ÷ the annual rate (in %) gives roughly how many years it takes money to double.
Taught in Time value of money: FV, PV, NPV and IRR
S
Sale
Any contract of sale of, contract to sell, or disposition of, a security or interest in a security for value.
See also Security
SEC
The Securities and Exchange Commission, the federal agency that enforces the federal securities laws and registers larger investment advisers.
See also Investment adviser, Exchange
Security
An instrument the Act lists (stock, bonds, notes, warrants, investment contracts and more) or one "commonly known as a security". Fixed insurance and fixed annuity contracts are excluded.
See also Investment contract, Stock
Self-regulatory organization (SRO)
A private organization, such as FINRA or an exchange, that writes and enforces rules for its members under SEC oversight.
Settlement
The official transfer of securities to the buyer and cash to the seller. Most U.S. stock trades settle one business day after the trade (T+1).
See also Stock
Shareholder
A person or institution that owns shares in a company.
See also Person
Shareholders' equity
Assets minus liabilities: the owners' book claim on the company.
Sharpe ratio
Excess return over the risk-free rate divided by volatility; return per unit of total risk.
See also Risk-free rate, Volatility
Simple return
(End price − start price) ÷ start price.
Skewness
A measure of a distribution's lopsidedness; negative skew means a longer tail of large losses.
See also Mean
Slippage
The difference between the price you expected and the price you actually got.
Solely incidental
The condition that lets lawyers, accountants, teachers, engineers and broker-dealers give some advice without being investment advisers: the advice must be only a by-product of their main work.
See also Investment adviser, Broker-dealer
Sortino ratio
Return above a target divided by downside deviation; like Sharpe but only penalizes bad volatility.
See also Downside deviation, Volatility
Sovereign debt
Bonds and loans issued by a national government.
Special compensation
Separate pay for advice, such as a planning fee or wrap fee. A broker-dealer that receives it loses its exclusion from the investment adviser definition.
See also Investment adviser, Broker-dealer
Stagflation
High inflation together with weak growth and rising unemployment.
See also Inflation
Standard deviation
The typical distance of values from their average; the square root of variance.
See also Variance
Standard error
How much an estimate (like a win rate or average) would vary from sample to sample; shrinks with √n.
See also Win rate
State-registered adviser
An investment adviser registered with one or more state Administrators rather than the SEC, generally because its AUM is under $100 million.
See also Investment adviser, Administrator
Statement of cash flows
A report of cash coming in and going out over a period, split into operating, investing and financing activities.
Stock
A share of ownership in a company, giving a claim on part of its assets and profits.
Stock split
When a company divides each share into more shares (for example 4-for-1), cutting the price per share without changing the company's value.
Stop order
An order that becomes a market order once the stop price is reached. Often called a stop-loss.
See also Market order
Stop-limit order
An order that becomes a limit order once the stop price is reached. It controls price but may not fill.
See also Limit order
Strike price
The fixed price at which an option holder can buy (call) or sell (put) the underlying. Also called the exercise price.
Taught in What an option actually is
Subpoena
A legal order to appear, testify or produce documents. The Administrator can issue them; a court enforces them if ignored.
See also Administrator
Successor firm
A new entity that takes over a registered firm's business. It can be registered for the rest of the year with no filing fee.
Support
A price area where buying has been strong enough to stop declines.
Surety bond
A bond posted to protect clients. Under NASAA's model rule an adviser that falls short of its net worth minimum is bonded for the gap, rounded up to the nearest $5,000.
See also NASAA
Survivorship bias
Distorted results from looking only at things that survived, e.g. testing on today's index members only.
Systematic risk
Market-wide risk shared by most assets that diversification can't remove.
See also Diversification
T
t-statistic
An estimate divided by its standard error; around 2 or more suggests the result is unlikely to be pure chance.
See also Standard error
The Greeks
A set of sensitivities (delta, gamma, theta, vega, rho) that estimate how an option's price reacts to changes in the stock, time, volatility and rates.
Theta
The estimated change in an option's price from one day passing, with everything else unchanged. Long options usually have negative theta.
See also Option
Three-part test (investment adviser)
The SEC/NASAA test for an investment adviser: advice about securities, being in the business of advising, and receiving compensation.
See also Investment adviser, NASAA
Time decay
The loss of extrinsic value as expiration approaches. It speeds up in the final weeks, especially for at-the-money options.
See also Option
Time value of money
The idea that a dollar today is worth more than a dollar later, because today's dollar can be invested to earn a return.
Taught in Time value of money: FV, PV, NPV and IRR
Timeframe
How much time each candle or bar on a chart represents, such as 5 minutes or 1 day.
Trade deficit
When a country imports more goods and services than it exports over a period.
Trading days
Days the exchange is open; 252 per year is the usual annualizing convention.
See also Exchange
Trading halt
A temporary stop in trading a single stock, often called by the listing exchange for pending news.
Trading journal
A record of each trade's plan, execution, result and lessons, used to measure and improve performance.
Trading suspension
An SEC order stopping trading in a stock for up to 10 trading days, often over concerns about information accuracy.
See also Trading days, Stock
Trailing stop
A stop whose trigger price follows the market by a set amount or percentage as price moves in your favor, and stays put when it moves against you.
Trend
The overall direction of price swings: higher highs and higher lows (up), lower highs and lower lows (down), or sideways.
Trendline
A sloped line connecting rising swing lows (uptrend) or falling swing highs (downtrend).
Trough
The low point of the cycle, where a contraction ends and a new expansion begins.
See also Contraction, Expansion
U
Uncovered (naked) option
A short option not backed by the shares (for a call) or by the cash (for a put) needed to perform if assigned. A naked short call has unlimited risk.
See also Option
Undefined risk
A position whose maximum loss has no fixed cap (or is very large), such as a naked short call.
Underlying
The asset an option is written on: a stock, an ETF, or an index.
Taught in What an option actually is
Unemployment rate
Unemployed people as a percentage of the labor force (employed plus unemployed). In the US it comes from the BLS household survey.
Uniform Securities Act
A model state securities law. The Series 65 tests the 1956 version as amended by NASAA; each state adopts its own variation.
See also NASAA
Unqualified opinion
An auditor's 'clean' opinion that the financial statements present fairly, in all material respects, in conformity with GAAP.
See also GAAP
Unsolicited order
A customer-initiated trade the broker-dealer did not recommend or solicit. Non-issuer unsolicited trades through a broker-dealer are an exempt transaction.
Unsystematic risk
Risk specific to one company or issuer (a failed product, a lawsuit, too much debt). Diversification can largely remove it.
See also Diversification, Issuer
V
Variable annuity
An annuity whose payments depend on a separate account invested in securities, so the buyer bears investment risk. It is treated as a security.
See also Security
Variance
The average squared distance of values from their mean; volatility squared.
See also Volatility, Mean
Vega
The estimated change in an option's price for a 1-percentage-point change in implied volatility. Larger for longer-dated options.
See also Volatility, Option
Vertical spread
Buying one option and selling another of the same type and expiration at a different strike. Gains and losses are capped on both sides.
See also Option
VIX Index
Cboe's index of the market's expectation of near-term S&P 500 volatility, derived from S&P 500 option prices and quoted annualized.
See also Volatility, Option
Volatility
How widely returns swing; in quant work, the annualized standard deviation of returns.
See also Standard deviation
Volatility drag
The loss caused by equal-sized ups and downs, for example +10% then −10% leaves you 1% down.
Volatility skew
The pattern of different implied volatilities across strikes of the same expiration. In equity indexes, lower strikes (puts) usually carry higher IV.
Taught in Reading an options chain like a pro
Volatility targeting
Scaling position size by target vol ÷ current vol to keep risk roughly constant.
See also Position size
Volume
The number of shares traded during a period.
W
Wick
The thin line above or below a candle's body showing the period's high or low.
Willful
Done intentionally, knowing what one is doing. Criminal penalties under the Act apply only to willful violations.
Win rate
The percentage of trades that make money.
Working capital
Current assets minus current liabilities, a quick measure of short-term financial cushion.
See also Current liabilities, Current assets
Writer (short)
The seller of an option. Receives the premium and takes on the obligation if assigned. Being short an option means you sold it to open.
Y
Yield curve
A line plotting the yields of bonds of the same credit quality (usually Treasuries) against maturity.
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