EquiTerms

If your question about investment-related terminology is not answered here, also see the Research section of this Website, where hundreds of terms are defined in our Glossary of Financial Terms.

What is Short Selling?
What is Going Long?
What is a Bull Market?
What is a Bear Market?
What is a Reward/Risk Ratio?
What is a Round Trip Trade?
What is Beta?
What is the Uptick rule?
What is Relative Strength?
What is a Peak-To-Valley Drawdown?
What is a Capital Drawdown?
What is a Sector/Group?
What is Active Money Management?
What is Passive Money Management?
What is a Turn Over Rate?


What does it mean to “Sell Short?”
Selling short refers to the sale of a stock that you don't own. A short sale is the sale of a security (stock) that is not actually owned by the seller, but that the seller promises to deliver. What this may sound a little confusing, it's actually a simple concept:

When you sell short a stock, your broker is “lending” you the stock. The stock will come from the brokerage's inventory, from another one of the firm's customers, or perhaps from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later you must “close the short” by buying back the same number of shares (which is called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money. Selling short is also referred to as being “bearish” on the market.

In today's market, you have many options when it comes to taking a short position. You can short an index like the NASDAQ 100 or buy put options. Shorting in the Futures market is a very simple process. If you are uncomfortable implementing a short position, you can simply buy a mutual fund that is inversely correlated to an index. In this way, it does all of the work for you. Whatever you decide, making money when the market is decreasing certainly is possible—if you know how to go about it.

What does it mean to “Go Long?”
Going long means purchasing an investment that will appreciate in value when the investment goes up in price. This is also referred to as being “bullish” on the market.

What is a Bull Market?
A bull market refers to an extended period of general price increases in the securities market.

What is a Bear Market?
A bear market refers to an extended period of general price decreases in the securities market.

What is a Reward/Risk Ratio?
This ratio, often called the "Upside/Downside Ratio," measures the amount of risk you are taking (that your capital will decrease) as compared to the reward (that your capital will increase) when you consider an investment. There are two different ways to calculate this ratio. If you are comparing two or more systems/managers, it is important to compare apples to apples by using the same calculation for each system. Below are your calculation options. If you have detailed trade information on the system/manager that you are evaluating, then we suggest that you calculate it as follows using simple division:

Number of winning trades X Average profit per winning trade
----------------------------------------------------------------------------------------
Number of losing trades X Average loss per trade

If you only have basic information on the system/manager, then we suggest you use the following calculation:

Average annual rate of return (Example: 30% )
------------------------------------------------------------------------ = 3 (or “3 to 1”)
Largest peak-to-valley drawdown (Example: 10%)

The objective of both calculations is to compare your REWARD to your RISK, and the higher the ratio, the better the system. In the above example (3 to 1), you are receiving $3 for every dollar you risk. Your minimum objective for any system or money manager should be no less than 2.

What is a Round Trip Trade?
A round trip trade describes a trade that includes both the purchase and sale of a security. In other words, a round trip trade consists of two transactions.

What is Beta?
Beta is what financial experts use to measure the up-and-down movement in an investment, such as a mutual fund. By definition, the market has a beta of 1.00—so a mutual fund with a beta higher than 1.00 is predicted to move up and down more than the market itself moves, and vice versa. For example, a fund with a beta of 1.15 is expected to increase or decrease in value with a variance of 15 percent more or less than the market.

What is the Uptick Rule?
The uptick rule dictates that you can only sell short on an uptick (a rise in the market). You can execute a market order to short-sell a stock on an uptick, or place a limit order one penny above the bid, without violating the uptick rule.

What is Relative Strength?
Very simply, it's a comparative measure of how well an investment has performed in relation to a specific benchmark. The industry standard benchmark is currently the S&P 500 index.

What is a Peak-to-Valley Drawdown?
It is the amount of decline from the maximum equity point that a security has achieved, expressed as a percentage.

What is a Capital Drawdown?
It is the amount of decline from the equity value of an investment at the time the trade was made, expressed as a percentage.

What is a Sector/Group?
This is a term for a particular group of securities that are considered to be in the same business category or industry.

What is Active Money Management?
It is a management style that attempts to invest with the direction of the market or a particular asset class. This type of management is also referred to as dynamic asset allocation or tactical asset management.

What is Passive Money Management?
This money management style is strategic in nature and involves investing across a broad spectrum of assets. The passive investor looks primarily at the fundamental strength of the investment and attempt to diversify by investing in multiple asset classes. In the mutual fund industry, this style is also known as indexing.

What is a Turnover Rate?
This term is used in the mutual fund industry, where it describes the percentage of total stocks that are bought and sold in a mutual funds portfolio over a 12-month period. A ratio of 100% means that all of the stocks in the portfolio have been bought or sold at some point in the past 12 months. The lower the ratio, the more the fund manager has employed a buy-and-hold (passive) investment strategy. The higher the ratio, the more active the fund manager has been in terms of buying and selling the investments.