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Unlock the Fundamentals of Stock, Options, and Futures

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Stocks
Options
Future
Definition
Stocks are securities that represent a fraction of ownership in a company. When you own a stock, you own a piece of that company, known as a share. For detailed information, visit Investopedia website.
Equity
Stocks are also referred to as equity because they represent ownership. Owning stock gives you a claim on part of the company's assets and earnings. For detailed information, visit Investopedia website.
Common Stock
The most common type of stock, granting shareholders voting rights on corporate policies and the election of the board of directors. Common stockholders may also receive dividends.
Dividends
These are portions of a company's earnings paid out to shareholders, usually on a quarterly basis. Companies may choose to reinvest profits back into the business or distribute them to shareholders.
Capital Gains
Stock capital gain is the profit earned when a stock is sold for more than its purchase price. It can be short-term (held for a year or less) or long-term (held for more than a year), and it's subject to taxes depending on how long the stock was held.
Stock Market
The profit from selling a stock for more than its purchase price. Long-term capital gains (on stocks held for more than a year) are usually taxed at a lower rate than short-term gains.
Exchanges
Platforms like the NYSE, NASDAQ, and London Stock Exchange (LSE) where stocks and other securities are traded. Each has its own listing requirements and rules.
IPO
Initial Public Offering is when a company first sells shares to the public. It allows companies to raise capital from public investors.
Market Capitalization
The total market value of a company's outstanding shares, calculated by multiplying the current stock price by the total number of outstanding shares. It helps to classify companies as small-cap, mid-cap, or large-cap.
Blue Chip Stocks
Shares of large, reputable, financially sound companies with a history of reliable performance. Examples include companies like Apple, Microsoft, and Coca-Cola.
Growth Stocks
Shares of companies expected to grow at an above-average rate compared to other companies. These often reinvest earnings into the business rather than paying dividends.
Value Stocks
Stocks that are considered undervalued compared to their intrinsic value, often trading at a lower price-to-earnings ratio. Investors buy these stocks in anticipation that their price will rise.
Income Stocks
Stocks that provide a steady income through high dividend payouts. These are typically mature companies with stable earnings.
Penny Stocks
Low-priced stocks of small companies, often traded over-the-counter. They are highly speculative and can be very risky due to their lack of liquidity and volatility.
Stock Ticker
A unique series of letters assigned to a publicly traded company for identification purposes on the stock market. For example, AAPL for Apple Inc.
Bull Market
A market condition where stock prices are rising or expected to rise. It is characterized by investor confidence and expectations of strong future financial performance.
Bear Market
A market condition where stock prices are falling or expected to fall. It reflects a decline of 20% or more in broad stock indices and is associated with widespread pessimism.
Volatility
Refers to the degree of variation in a stock's price over time. High volatility means the stock price moves significantly up and down, presenting higher risk and potentially higher returns.
Liquidity
The ease with which a stock can be bought or sold in the market without affecting its price. Highly liquid stocks can be quickly sold with little impact on their price.
Bid-Ask Spread
The difference between the highest price a buyer is willing to pay for a stock (bid) and the lowest price a seller is willing to accept (ask). Narrow spreads indicate a highly liquid market.
Limit Orders
Orders to buy or sell a stock at a specific price or better. They offer price control but may not execute if the stock doesn't reach the set price.
Stop Orders
Orders to buy or sell a stock once it reaches a certain price, known as the stop price. Stop orders can help protect profits or limit losses.
Brokerage Account
An account through which an investor can buy and sell stocks, bonds, mutual funds, and other securities. It can be managed by full-service brokers, discount brokers, or online trading platforms.
Online Brokers
Digital platforms like E*TRADE, TD Ameritrade, and Robinhood that allow investors to trade stocks online. They often offer lower fees compared to full-service brokers.
ETF
Exchange-Traded Fund, a type of investment fund that holds a basket of securities and trades on an exchange like a stock. ETFs offer diversification and are usually more cost-effective than mutual funds.
Index Funds
A type of mutual fund or ETF designed to replicate the performance of a specific index, like the S&P 500. They offer broad market exposure, low operating expenses, and low portfolio turnover.
Stock Indices
Benchmarks that track the performance of a group of stocks. Examples include the Dow Jones Industrial Average (DJIA), the S&P 500, and the NASDAQ Composite.
Fundamental Analysis
A method of evaluating a stock by examining related economic, financial, and other qualitative and quantitative factors. It includes analyzing a company’s financial statements, management, and competitive advantages.
Technical Analysis
A trading discipline that uses charts and other tools to predict future price movements based on past market data, primarily price and volume.
Earnings Reports
Quarterly statements that companies release to inform investors about their financial performance. Key figures include revenue, net income, earnings per share (EPS), and guidance for future performance.
PE Ratio
Price-to-Earnings ratio, a valuation measure calculated by dividing the current stock price by the earnings per share (EPS). It indicates how much investors are willing to pay per dollar of earnings.
Dividend Yield
A financial ratio that shows how much a company pays out in dividends each year relative to its stock price. Calculated as annual dividends per share divided by the price per share.
Market Sentiment
The overall attitude of investors toward a particular stock or the stock market as a whole. Sentiment can drive stock prices up or down and is influenced by news, earnings, and economic data.
Economic Indicators
Statistics like GDP, inflation rates, and unemployment rates that provide insight into the economic health and can impact stock prices. Positive indicators can boost investor confidence, while negative ones can trigger sell-offs.
Corporate Actions
Events initiated by a company that affect its stock and shareholders, such as stock splits, dividends, mergers, and acquisitions.
Stock Split
An action where a company increases the number of its outstanding shares by issuing more shares to current shareholders. This reduces the stock price but does not change the market capitalization.
Risk Tolerance
An investor's ability and willingness to endure declines in the value of their investments. Risk tolerance varies based on age, investment goals, income, and other factors.
Asset Allocation
The process of dividing investments among different kinds of assets, such as stocks, bonds, real estate, and cash, to balance risk and reward based on an individual's goals and risk tolerance.
Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an asset at a specified price before a specified date.
There are two main types of options - call options and put options.
Gives the holder the right to buy an asset at a specified price within a specific time period.
Gives the holder the right to sell an asset at a specified price within a specific time period.
The price at which the option holder can buy (call) or sell (put) the underlying asset.
The date on which the option expires. After this date, the option cannot be exercised.
The price paid by the buyer to the seller (writer) of the option for the rights conveyed by the option.
A call option is ITM if the stock price is above the strike price. A put option is ITM if the stock price is below the strike price.
A call option is OTM if the stock price is below the strike price. A put option is OTM if the stock price is above the strike price.
An option is ATM if the stock price is equal to the strike price.
The difference between the current price of the underlying asset and the strike price of the option. For calls, it’s max(0, Stock Price - Strike Price). For puts, it’s max(0, Strike Price - Stock Price).
The portion of the option's premium that exceeds its intrinsic value, representing the potential for further gains before expiration.
The financial instrument (e.g., stock, index, ETF) on which an option is based.
Can be exercised at any time before the expiration date.
Can only be exercised on the expiration date.
A market condition where stock prices are rising or expected to rise. It is characterized by investor confidence and expectations of strong future financial performance.
The seller of an option who collects the premium and has the obligation to fulfill the contract if exercised.
When the option writer owns the underlying asset. Covered calls are common strategies for income generation.
When the option writer does not own the underlying asset, posing significant risk.
Long-term Equity Anticipation Securities are options with expiration dates longer than one year.
A listing of all available option contracts for a particular security, organized by expiration date and strike price.
A measure of how much the price of the underlying asset is expected to fluctuate. Higher volatility increases option premiums.
The market's forecast of a likely movement in the underlying asset's price. It’s derived from the option’s price.
The actual past volatility of the underlying asset, based on historical price movements.
Measures the sensitivity of an option's price to changes in the price of the underlying asset. For calls, delta ranges from 0 to 1; for puts, from -1 to 0.
Measures the rate of change of delta over time or for one unit change in the price of the underlying asset.
Measures the rate of decline in the value of an option due to the passage of time, also known as time decay.
Measures the sensitivity of the option price to changes in the volatility of the underlying asset.
Measures the sensitivity of the option price to changes in interest rates.
Include buying calls, selling puts, and bull call spreads, which profit from rising asset prices.
Include buying puts, selling calls, and bear put spreads, which profit from falling asset prices.
Aim to profit from minimal movement in the underlying asset, such as straddles and strangles.
Buying a call and put option with the same strike price and expiration date, betting on high volatility.
Buying a call and put option with different strike prices but the same expiration date, betting on significant movement in either direction.
Combining two or more options to limit risk and profit potential. Examples include vertical spreads, horizontal spreads, and diagonal spreads.
Involves buying and selling options of the same type (calls or puts) with different strike prices but the same expiration date.
Involves buying and selling options of the same type with the same strike price but different expiration dates.
Involves buying and selling options of the same type with different strike prices and expiration dates.
Futures are standardized financial contracts obligating the buyer to purchase, and the seller to sell, an asset at a predetermined future date and price.
Futures can be based on a wide range of assets including commodities (like oil, gold, and wheat), financial instruments (like currencies, interest rates), and indexes (like the S&P 500).
Futures contracts are standardized in terms of quality, quantity, and delivery dates to facilitate trading on futures exchanges.
Futures are traded on regulated exchanges such as the Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE), and Eurex.
Each futures contract specifies the amount of the underlying asset, known as the contract size. For example, one oil futures contract typically represents 1,000 barrels of oil.
The date on which the futures contract is settled. Futures contracts can have different expiration cycles (monthly, quarterly, etc.).
Futures contracts can be settled either by physical delivery of the underlying asset or by cash settlement, where the difference between the contract price and the market price is paid.
To trade futures, traders must deposit an initial margin, which is a percentage of the contract's value, as a performance bond. Maintenance margin is the minimum amount required to keep a position open.
Futures trading involves leverage, allowing traders to control large positions with a relatively small amount of capital. This can magnify both gains and losses.
Futures accounts are settled daily based on the market closing prices, and profits and losses are credited or debited accordingly.
Futures are widely used for hedging to protect against price movements in the underlying asset. Producers, consumers, and investors use futures to lock in prices and manage risk.
Traders also use futures for speculation, aiming to profit from price movements. Speculators provide liquidity to the market.
Buying a futures contract in anticipation of rising prices.
Selling a futures contract in anticipation of falling prices.
The total number of outstanding futures contracts that have not been settled. It indicates market activity and liquidity.
The number of contracts traded during a specific period. High volume indicates a liquid market.
The minimum price movement of a futures contract. It varies by contract and exchange.
Many futures contracts have daily price limits to prevent extreme volatility. Trading may be halted if prices move beyond these limits.
The difference between the spot price of the underlying asset and the futures price. Basis can be positive or negative and changes over time.
A market condition where futures prices are higher than the spot price, typically due to carrying costs such as storage and insurance.
A market condition where futures prices are lower than the spot price, often due to supply shortages or high demand for immediate delivery.
Involves taking opposite positions in two related futures contracts, such as calendar spreads (different expiration dates) or inter-commodity spreads (different but related commodities).
Traders exploit price discrepancies between related markets or contracts to earn risk-free profits. Arbitrage helps to keep prices in alignment.
Options on futures give the holder the right, but not the obligation, to buy or sell a futures contract at a specified price before expiration.
An intermediary between buyers and sellers in futures markets, ensuring the integrity of transactions and managing risk through margin requirements and daily settlements.
The initial amount of money required to open a futures position. It acts as a security deposit to cover potential losses.
The minimum amount of equity that must be maintained in a futures account. If the account falls below this level, a margin call is issued.
A demand by the broker for the trader to deposit additional funds to bring the account back to the maintenance margin level.
Participants who use futures to protect against price risk. Examples include farmers, manufacturers, and airlines.
Participants who use futures to profit from price movements without any intention of taking delivery of the underlying asset.
Details about a futures contract, including the underlying asset, contract size, tick size, trading hours, and delivery terms.
The process of fulfilling the contract by providing the underlying asset. Physical delivery involves the actual transfer of the asset, while cash settlement involves a cash payment.
A firm that solicits or accepts orders to buy or sell futures contracts and accepts money or other assets from customers to support such orders.
A broker who introduces clients to an FCM but does not accept money or assets from customers. They receive commissions for the trades executed by the FCM.
The regulatory agency in the United States overseeing futures markets to ensure integrity and protect market participants.
Limits set by exchanges and regulators to prevent excessive speculation and potential market manipulation.
Similar to futures but are non-standardized and traded over-the-counter (OTC). Forward contracts are customizable but carry higher counterparty risk.
The process of dividing investments among different kinds of assets, such as stocks, bonds, real estate, and cash, to balance risk and reward based on an individual's goals and risk tolerance.