[B]
Back Testing – optimizing a trading strategy on historical data and applying it to fresh data to see how well the strategy works.
Balance Sheet – a financial statement, which lists the company’s assets (the “left-side”) and all the claims against them (“the right-side”) as of a certain date. Also called the statement of financial position. The “right-side” includes the liabilities (amounts owed to all parties other than the shareholders) and the shareholders equity. The total assets must equal the total liabilities and shareholders equity. The balance sheet is particularly important in determining a company’s net worth. However, balance sheets do not reflect long term potential of companies, which is important for valuing many of today’s companies such as tech stocks.
Basis – the price an investor pays for a security plus any out-of-pocket expenses. It is used to determine capital gains or losses for tax purposes when the stock is sold.
Basis Point – one one hundredth of one percent (0.01%). Used in measuring interest rates and yield of various investments. For example: If a bond yield changes from 6.25 % to 6.39 %, that’s a rise of 14 basis points. (Each percentage point of yield in bonds equals 100 basis points.) And if someone says, “The interest rate for home mortgages has just gone down 50 basis points”, that means that those rates have gone down 1/2 a percentage point.
Bear – an investor or an analyst who believes a stock or the overall market will decline. They are also said to be ‘bearish’.
Bear Market – a term used to refer to a prolonged period of falling stock prices (usually by 20% or more) such as the great bear market of the early 1970s.
Bear Raid – a situation in which large traders sell positions with the intention of driving prices down.
Bear Spread – an option strategy with maximum profit when the price of the underlying security declines. Maximum loss occurs if the underlying security rises in price. The strategy involves the purchase and simultaneous sale of options. Puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options have the same expiration date.
Bear Trap – a false signal, which indicates that the rising trend of a stock or index has reversed when in fact it has not.
Beta – a statistical measure of the sensitivity of a stock price to changes in the market index (usually the S&P 500 for US stocks). To calculate beta from a stock’s historical stock prices, create a scatter chart of paired data points. Each data point represents the return on the stock for a given period (usually monthly) and the return on the market for the same period. Five years of monthly returns for the stock and the market would yield 60 data points, for example. When these data points are plotted on a chart where the x axis is the market return in excess of the risk-free rate and the y axis is the stock return, they will tend to fall around an upward sloping line. Beta is defined as the slope of the least-squares regression line fitted through these points. The equation behind the line is S = a + (b times M), where ‘S’ is the stock return, ‘b’ is the beta, ‘M’ is the market return, and ‘a’ is the alpha. If the stock tended to move up and down about the same amount as the market, the line would be a 45-degree angle, and the beta would be 1.0. Stocks that tended to move up and down more than the market would have beta greater than 1.0, while those moving up and down less than the market would have beta less than 1.0. (For example: a beta of 0.7 means a stock price is likely to move up or down 70 % of the market change; 1.3 means the stock is likely to move up or down 30 % more than the market.) Rarely, a stock may show a beta of less than 0, meaning it tends to go up when the market goes down and vice versa. Beta is related to volatility, but is not the same thing (see volatility). Also, the historical beta is not necessarily a good predictor of future beta. Some practitioners start with the historical beta and then try to improve the beta measure by incorporating accounting-based adjustments.
Bid – the price you can sell a security at. The highest price a buyer is willing to pay. (And therefore the price one would receive for selling, assuming no change in the bid and ask prices.) See also Ask.
Block – a large purchase or sale of stock, usually 10,000 shares or more.
Blow off Top – in technical analysis: steep and rapid increase in price followed by a steep and rapid drop in price.
Blue Chip Stock – stock of a high-quality, large and well-known company that has a long history of successful operation and, generally, a long period of uninterrupted dividend payments to stockholders. The term arose from the color of the highest value poker chip. There is no official listing of stocks that designates them as blue chips or not. The designation is rather a matter of common usage. Companies that are referred to as blue chip stocks include, for instance, AT&T, General Electric, IBM, General Motors, Exxon, Procter&Gamble and many others. Blue chip stocks tend to be conservative investments that vary less in value than the stocks of smaller and newer companies. Blue chip stocks are less likely than most stocks of doubling in value or suffering a big decline in value.
Bond – a certificate of indebtedness. The issuer or borrower promises to pay the bondholder (creditor or lender) a specified amount of interest for a specified time period and to repay the debt (or principal) at the end of a specified period (the maturity of the bond). A bond has a maturity of more than a year. Obligations originally due in less than a year are called “notes”. A secured bond is one that is backed by collateral that may be sold if the issuer fails to pay interest and principal when they are due. An unsecured bond (also called a debenture) is only backed by the full faith and credit of the issuer. A convertible bond gives the holders rights to convert the bond to another security (usually common stock) under certain conditions. An exchangeable bond can be turned in for another security (e.g. for preferred stock, or for a bond issued by another company.) Bonds are valued by how much interest they pay and how stable the issuer is. The US government is one of the most stable issuers of bonds known today. See also High Yield Bond, Junk Bond, Municipal Bond, Zero Coupon Bond.
Book Value – the value of a company’s shareholder equity, as recorded on its balance sheet. It is usually expressed on a per share basis (i.e. shareholder equity in millions of dollars divided by the number of shares outstanding in millions). Accounting rules are not designed to produce a book value that measures the value of the company, and so the book value is not necessarily correlated with the company’s market value per share.
Box Spread – option arbitrage in which a profitable position is established with no risk. One spread is established with call options. The other spread is established using put options.
Breadth, Market – relates to the number of issues participating in a market move. The move can be either up or down. As a rally develops, and the number of advancing issues is declining, the rally is suspect. As a decline develops, and the number of declining issues falls, the decline becomes suspect.
Breakout – a rise in a security’s price above a resistance level (commonly its previous high price) or drop below a level of support (commonly the former lowest price.) A breakout is taken to signify a continuing move in the same direction.
Broker – the individual or organization that will execute your trade orders for you and will keep an account for your investments and cash.
Bull – an investor or an analyst who believes that the market or a stock is going to go up. They are also said to be ‘bullish’.
Bull Market– periods in time when the stock market goes up in value month to month, a market, which is on a consistent upward trend. Most of the time in history the US market has been a bull market.
Bull Spread – an option strategy in which the maximum profit is attained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold and the options have the same expiration date.
Bull Trap – a false signal, which indicates that the price of a stock or index has reversed to an upward trend but which proves to be false.
Butterfly Spread – an option strategy combining a bull and bear spread. Four strike prices are used. The lower two strike prices are used in the bull spread and the higher two strike prices are used in the bear spread. Either puts or calls can be used. This strategy has limited risk and limited profit.
Buy and hold Strategy – holding securities for long periods in order to reduce transactions costs and avoid selling on temporary declines.
Buyer’s Market – a market in which the buyer has the advantage over the seller because supply exceeds demand, and prices are declining or low. The opposite of a seller’s market.
Buyout – purchase of a controlling interest (or percent of shares) of a company’s stock. See also Leveraged Buyout, Management Buyout.