Glossary of Terms used in Finance and Share Analysis

 

Bollinger Bands

Bollinger Bands are 'envelopes' that surround the closing price on a chart. The bands are calculated using the volatility (or standard deviation) of the share price. The two envelopes indicate the upper and lower extremes that the price could rally or fall to. The bands grow wider apart and move further away from the actual range of the share price in more volatile conditions - indicating that any movement in price could potentially be quite large. Similarly in less volatile conditions, the bands tend to be closer to the actual share price - again indicating that the any share price move will most likely be small.
Bollinger Bands themselves do not produce buy or sell signals, but should be used in conjunction with other indicators or chart formations (e.g. with stochastics and candlestick formations).

Candlestick:

A candlestick is a graphic plot of the open, high, low and close of the day of a share. If the open of the day was higher than the close, then the body of the candle is black. If the open was lower, then the body of the candle is white. Candlestick charts can give clues to future movements in price that the daily price close chart alone cannot. The 'wicks' of the candle give the high and low of the day.

Double bottom:

A reversal pattern. When the price chart displays a 'W' formation after an established downtrend. Confirmation of the pattern occurs when price moves 3% through the apex of the 'W'. An upward price movement equal to the height of the 'W' is likely to occur.

Double top:

Another reversal pattern, this time when the price chart forms an 'M,' after an established uptrend. As with the double bottom, confirmation occurs when price moves 3% through the bottom of the 'M'. A downward price movement equal to the height of the 'M' is likely to occur.

Flag:

A flag is a period of congestion, less than three weeks long in duration, which forms after a large, near vertical, change in price. A price movement equal to the height of the change in price is likely to occur. Three successive daily closes will invalidate the objective of the flag.

Head and shoulders:

A reversal or a continuation pattern. A head and shoulders top is when price forms a pattern similar to that of diagram A. After an uptrend, head and shoulder tops often indicate a reversal in trend. A head and shoulders bottom (diagram B) is formed after a downtrend and again often indicates a change in trend.

MACD:

The MACD indicator is calculated by taking the difference of two moving averages; one longer term and the other shorter term (e.g. the difference between 63 day moving average and the 21 day moving average) and plotting the result below the price chart. The result is an indicator that oscillates around the zero level giving a crude measure of overbought (positive) values and oversold (negative) values.

Momentum:

Momentum is the percentage change in price over a predetermined time period. We usually use a 63-day momentum in our analyses. Momentum plots give an idea as to whether a stock is overbought or oversold.

Moving Average:

An average of the closing prices of a share, over a predetermined period of time, is known as a moving average. An average has the effect of 'smoothing' the price data. We typically use the one-month, three-month and one-year averages in our analyses.

On Balance Value (OBV):

OBV's calculation is extremely simple: The number share traded that day (or volume) is given a positive or negative value depending on whether that share price rallied or fell; positive if the share rallied, negative if the share price fell. A running total is then kept by adding each day's OBV to the previous one and so on to create an OBV line. Typically, negative values for the OBV would give an oversold signal, and positive values would give an overbought signal.

Overbought:

When used in finance, the market price of a share that has risen too quickly without reason.

Oversold:

Again, when used in finance, market a price that declines too quickly without reason.

Relative Strength Index (RSI):

The RSI indicator was developed by Welles Wilder and is a system for giving buy and sell signals. The RSI is an oscillator on a scale from 0 to 100 and its calculation is based on the difference between the average of the closing price on up days versus the average closing price on down days.
In theory, the most useful aspect of the RSI indicator is when there is a divergence between it and the price chart. Usually, if this were to occur, then a reversal in the current trend in price may occur.

Short sale:

A short sale has the objective of making a capital gain on the decline of a share price. This can be achieved by borrowing shares you do not own from a stockbroker and replacing them after a certain period of time. Having borrowed the stock, the short seller is then free to sell them and buy them back later at a cheaper price, thus making a profit.

Stochastics:

A mathematical formula based on a share's price closing level compared with its price range over a specific period of time. Stochastic indicators give a measure of how overbought or oversold a particular stock is.

Trendline:

When a price chart forms a low, a high, a higher low and a higher high, a line drawn across the lows is said to be an uptrend. Similarly, when a price chart forms a high, a low, a lower high and a lower low, a line drawn across the highs is said to be a downtrend. Uptrends represent potential supports, from which the share price may rally. Downtrends represent potential resistances, from where the share price may fall.

Trend channel:

A trend channel is formed when price oscillates between two parallel trendlines. Trend channels can be either ascending (upward sloping), descending (downward sloping) or horizontal.

Triangle:

Triangles can be a reversal or a continuation pattern. A sideways congestion of the share price chart, where each minor top fails to attain the height of the previous rally and each minor bottom stops above the level of the previous low. The line joining the tops must slant downwards, and the line joining the lows must slant upwards.

Wedge:

A formation in which the price fluctuations are within converging straight lines. Wedges are continuation or reversal patterns of the major trend; that is, they may indicate a change in trend. Wedges can ben either upwards- or downwards-sloping. Upward in a downtrend and downward in an uptrend .

Williams %R

Williams %R is based on measuring the latest close in a price to the price's range over a certain number of (fixed) days. It is calculated by taking today's close and subtracting it from the price high of the given range and this is then divided by total range for the same period. William % R is an oscillator between 0 and 100, but its scale is reversed, meaning that an overbought reading is above 20 and an oversold reading is under 80.

 

GLOSSARY OF GENERAL TERMS USED IN THE FINANCIAL MARKET PLACE

Alternative Investment Market (AIM) - A junior market compared with the main London Stock Exchange with less onerous listing requirements so it tends to attract smaller companies that have been trading for a short period of time.

Bear - An investor who believes that the market is trending downwards.

Belt Hold+ - A candlestick chart that opens on its low and closes near to its high, during bearish prices. This can signal a change in investor sentiment from bearish to bullish.

Belt Hold- - A candlestick chart that opens on its high and closes near to its low, during bullish prices. This can signal a change in investor sentiment from bullish to bearish.

Beta - A measure of the volatility of a given company relative to the overall market. A beta greater than 1 is more volatile than the market, less than 1 is less volatile.

Bull - An investor who believes that the market is trending upwards.

Called up Share Capital - Nominal value of shares of the company that are issued and fully paid.

Capital Employed - Fixed assets plus current assets minus current assets. Capital employed is the value of the assets that contribute to a company's ability to generate revenue.

Cash Flow - This provides a measure of the company's financial health. This equals cash receipts minus cash payments over a given period of time.

Dividend Cover - A company's ability to pay ordinary dividends to shareholders out of profits earned and is calculated by dividing the adjusted Earnings Per Share (EPS) by the total dividend per share.

Dividend Payment Date - The date on which the most recent dividend will be paid to shareholders.

Dividend Per Share Growth - The percentage change from the previous year in the dividend paid on each share.

Dividend Yield
Dividend Yield is the percentage of a company's share price that it pays out as dividends over the course of a year. The Dividend Yield is calculated as

(Total Dividend/ Share Price)*100

Dividend Yield is displayed as a percentage.

Earnings per Share - A company's profitability expressed on a per share basis and calculated by dividing the company's annual earnings after tax by the number of shares in issue.

EPS Growth
EPS Growth shows the relative growth of a company's earnings over the last year. A negative value indicates the company's earnings fell in the last year. It is calculated as:

[(Current year EPS - Last year EPS)/Last year EPS]*100.

EPS Growth is displayed as a percentage.

Exchange Traded Fund (ETF) - ETFs are a kind of collective investment fund competing with investment trusts and unit trusts for investor's money. ETFs are a lot like conventional tracker funds, pooling the cash of a large number of investors and investing it a basket of shares in companies that make up an index. ETFs are open ended but they do not usually have initial charges and their annual management charges are much lower.

Ex-Dividend Date - The date at which a new shareholder is no longer entitled to the most recent dividend payment.

Gearing - Companies are financed by a combination of debt and shareholders equity. A gearing ratio will tell how much a company has borrowed in relation to the amount of shareholders funds in the business.

Gross Gearing - Calculated by dividing gross borrowings by shareholder funds.

Intangible Assets - A company's long-term assets that are usually non-physical in nature, but represent a right or expected future benefit. Examples are goodwill, brands and trademarks.

IPO - Initial Public Offering, the term used for any company joining the stock market. It is a way for companies to raise cash and increase and diversify the current shareholder base.

Investment Trusts - a collective fund in the form of a listed company holding a portfolio of securities on behalf of its own shareholders. An investment trust and its shares are tradable in the same way as other companies and shares.

ISIN - International Securities Identification Number. A unique international 12 digit code which identifies a security issue.

MACD (Moving Average Convergence/Divergence) - The MACD indicator is an oscillator based on two exponential moving averages of a share price. Three lines are shown. The "MACD" line is calculated as the difference between the two moving averages (usually based on 12- and 26- day averages). The "signal" line is a 9-day smoothed average of the standard MACD line, and is sometimes referred to as the "slow" MACD line. Tip: Traders use MACD lines to generate trading signals in a number of ways. One method is to spot when the MACD and the signal lines cross each other. A buy condition could be generated when the MACD line crosses above the signal line, and a sell condition when the MACD lines crosses below the signal line.

Market Capitalisation - The market value of a company, calculated by multiplying the current share price by the number of shares in issue.

Momentum - Momentum is an oscillator that measures the rate of price change (as opposed to the actual levels themselves). It is calculated by taking price differences for a fixed time interval. This positive or negative value is plotted around a zero line. Tip: You can use the momentum indicator to see when an upward or downward run in the share price is losing momentum. When a positive momentum line starts to drop towards the zero line, the upwards trend can be considered to be losing momentum. In addition some traders use the crossing of the zero line as a trading signal, with a rise above the zero line being a buy signal.

Moving Average - A moving average is a very useful tool which allows you to assess the share price trend over time. It is also used to identify when a new trend has begun or an old trend has ended.

In effect it is a smoothed version of the price chart - which is plotted by taking an average of previous share prices over different periods.

Simple moving averages are based on the arithmetic mean of the share price over the last X days, where X is the selected frequency. Tip: When prices have risen significantly above or below the moving average trend line this could indicate overbought or oversold conditions respectively.

Net Assets - The total figure for all assets less all liabilities.

Net Asset Value - The value of the shareholders interest in a company, calculated by subtracting liabilities from assets.

Net Asset Value (Funds) - The price of each share of a mutual fund. It is calculated by subtracting the fund's liabilities from its total assets, and dividing that figure by the number of shares outstanding. The NAV is the amount of money that an investor would receive for each share if the mutual fund sold all of its assets, paid off all of its outstanding debts, and distributed the proceeds to shareholders.

Net Gearing - Net Gearing is a general measure of indebtedness. This ratio is calculated as: [ (Total Liabilities- Cash at Bank & in Hand)/Shareholder Funds ] *100

Net Gearing is displayed as a percentage.

OFEX - A British share trading and information service that enables investors to buy and sell shares in companies whose shares are not traded on the London Stock Exchange

Offer Price - The price at which a market maker will buy a security.

Official List - The UK Listing Authority's list of all listed securities.

Operating Margin - This is the trading margin for each period reported, showing trading profit as a percentage of sales, or total trading revenues.

The calculation is as follows: Trading profit/total sales x 100 = margin (%)

Oscillator - Oscillators can be used in conjunction with price charts to identify short-term market extreme conditions, often referred to as "overbought" or "oversold" conditions. Oscillators can also be used to identify shifts in trends before they become evident in the price chart itself.

Overbought - A share is considered to be overbought if its price has risen too much or it is too expensive. There are a number of technical analysis tools used to identify overbought conditions, and this can be considered a signal to sell the share.

Oversold- A share is considered to be oversold if its price has dropped too much or it is underpriced. There are a number of technical analysis tools used to identify oversold conditions, and this can be considered a signal to buy the share.

P/E Ratio - The PE Ratio or Price to Earnings is used as a measure of how highly a company is valued, sometimes referred to as it's "rating". The P/E ratio also gives an indication of how quickly the company is expected to grow - a high PE indicates that a company is expected to see EPS grow quickly in the future. For example, technology stocks tend to have much higher P/E ratios than utilities. This means that P/E ratios are only a useful comparison for similar stocks, for example stocks in the same sector.

The PE is calculated as share price/EPS.

PEG Ratio - A stock's P/E ratio divided by its yearly growth rate. In general, the lower the PEG, the better the value, because the investor would be paying less for each unit of earnings growth. PEG or Price to Earnings Growth ratio is used by some investors to find undervalued stocks.

The PEG is calculated as PE Ratio/EPS Growth and is expressed as a number.

Placing - A form of issue of securities in the UK, typically with a predetermined number of non-retail investors.

Preference Shares - Fixed dividend shares that rank above ordinary shares if a company is wound up. Preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders.

Price to Book Ratio - This measures the market's valuation of a company and is calculated by taking the market cap and dividing it by the book value - the overall value of a company as reported in its financial statements.

Price to Sales Ratio - A measure of a company's value calculated by taking the market cap and dividing it by the sales over the last 12 months.

Regulatory News Service - The means by which UK listed companies make announcements to the London Stock Exchange.

RiskGrade - Helps investors measure and compare the risk of financial investments to other companies at the same point in time. Visit http://www.riskgrades.com/retail/what_is/what_is.cgi to learn more about RiskGrades.

ROCE - (Return on Capital Employed). This is a measure of the return from invested and borrowed capital. The return is the pre-tax profit earned before charging borrowing costs.

RSI - The Relative Strength Index (RSI) measures a share price relative to itself and its recent history. It is calculated as the average of the prices for days where the price rose divided by the average of the prices for days where the price fell.

The RSI ranges between 0 and 100. Tip: An RSI value above 70 or 80 is often used to indicate an overbought situation. An RSI value below 20 or 30 is often used to indicate an oversold situation.

SEDOL - The Stock Exchange Daily Official List number, a code used by the London Stock Exchange to identify stocks, especially those that aren't actively traded in the U.S. and don't have a CUSIP number.

Ticker - The three- or four- letter trading symbol assigned to the share (and some types of fund - investment trusts and ETF's) by the exchange on which it trades. Investors often refer to shares by their ticker symbols because of their brevity and because they often remain the same even if a company's name changes.

VWAP (Volume Weighted Average Price) - A measure of the price at which the majority of a given day's trading in a given security took place. This is calculated by dividing the value of trades executed by the volume of shares traded over a given period.

Williams %R - A technical indicator which measures overbought/oversold levels in a very similar way to that of the Stochastic Oscillator, except that %R is plotted upside-down 0% to -100%. Readings in the range of 80 to 100% indicate that the security is oversold while readings in the 0 to 20% range suggest that it is overbought.