The effect that arises when a stock trades at a certain multiple and, while earnings may be strong, the stock price doesn't move up (or even goes down). The result is that the given multiple (P/E ratio) is reduced even though nothing is fundamentally wrong with the company. Compression of a company's multiple can be interpreted as the valuation being called into question. Remember, the multiple is based off of many factors, but most importantly the future expectations of a company. If a company trades at say, a P/E multiple of 50, this means investors are paying $50 for each $1 of earnings. Generally, an investor would only pay such a high multiple on the expectation that the company will grow significantly faster than its competitors or the stock market in general. When the company's growth rates start to slow, investors might start to doubt its growth prospects, and thus not pay an expensive a premium as they once did. In our case, the company might experience multiple compression with the P/E shrinking to 25, even though earnings haven't changed. With the same earnings of $1, this would mean that the stock price fell in half (25/50 = 1/2). This demonstrates how the stock price could go down when earnings stay the same.
A type of risk that occurs when a financial model used to measure a firm's market risks or value transactions does not perform the tasks or capture the risks it was designed to. Model risk is considered a subset of operational risk, as model risk mostly affects the firm that creates and uses the model. Traders or other investors who use the model may not completely understand its assumptions and limitations, which limits the usefulness and application of the model itself. Any model is a simplified version of reality, and with any simplification there is the risk that something will fail to be accounted for. The use of financial models has become very prevalent in the past decades, in step with advances in computing power, software applications and new types of financial securities. The Long Term Capital Management debacle was attributed to model risk - in this case, a small error in the fund's computer models was made larger by several orders of magnitude because of the highly leveraged trading strategy LTCM employed.
The use of wireless technology in securities trading. Mobile trading allows investors to access trading platforms from their telephones rather than being confined to traditional trading methods via computer. Such technology allows easier access for smart phone users to actively manage their portfolios even when they are away from a desktop/laptop. While mobile devices, such as the Blackberry and iPhone, allowed users to check the performance of the stock market, mobile trading applications provide access to online trading platforms which can be utilized to execute trades instantly.
A type of order for a number of securities that is not a round (or whole) lot order amount. This type of order is comprised of a round lot order and an odd lot order. A round lot is the exchange-established trading unit, which defines the interval at which securities typically should be traded. An odd lot is an order that falls below the initial round lot amount. Stocks typically trade in round lots of 100, which means orders made in these intervals are traded easily between parties. An odd lot would be all orders for 99 shares or fewer.If an investor wanted to buy 425 shares he or she would use a mixed lot order, which is broken into an round lot order for 400 shares (4 x 100 round lots) and an odd lot order for 25 shares.
The initial amount required to be deposited in a margin account before trading on margin or selling short. For example, the NYSE and the NASD require investors to deposit a minimum of $2,000 in cash or securities to open a margin account. Keep in mind that this amount is only a minimum - some brokerages may require you to deposit more than $2,000. When you buy on margin, there are key levels - as governed by the Federal Reserve Board's Regulation T - that must be maintained throughout the life of a trade. The minimum margin, which states that a broker can't extend any credit to accounts with less than $2,000 in cash (or securities) is the first requirement. Second, an initial margin of 50% is required for a trade to be entered. Third, the maintenance margin says that you must maintain equity of at least 25% or be hit with a margin call.
A term used to describe the average rate agreed upon when conducting foreign exchange. The middle rate is calculated using the median average of the bid and offer rates. The middle rate intuitively is the rate in the middle of the prices offered by the market makers. For example: The offer price is 1.5 and the bid price is 2.0. Using the median average, the middle rate would be 1.75. This rate can also be called the mid-rate, mid-price, etc.
In techincal analysis, An intangible principle for finding mininum security price targets for traders. The measuring principle uses technical analysis to analyze chart patterns to detect stock levels that, if broken, could lead to a small down leg. More specifically, it allows traders to set a reasonable minimum price target on a stock by weighing the movements of the stock chart pattern against each other. The measuring principle works well with any clearly-defined technical chart pattern, such as a head-and-shoulder formation or rectangle or triangle. There is no hard and fast mathematical proof that this analysis technique works, but historically it has tended to be relatively accurate. If the stock price begins to diverge from the expected outcome according to the principle, then quick action may be necessary.
The difference between the price at which a market maker is willing to buy a security and the price at which the firm is willing to sell it (the difference between the bid and ask for a given security). Because each market maker can either buy or sell a stock at any given time, the spread represents the market maker's profit on each trade. Market makers are limited in the size of spread they can offer. The bid/ask spread has a maximum size to prevent cheating and manipulation of stock prices.
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