GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 1 OF 9 This chapter explains a number of financial terms as they are used in the Stock Charting System. It is not intended to be a complete text on financial management or technical analysis. Many books on technical analysis are available, and entire college courses are taught on the subject. Check out a local library, or visit a book store that has a good business section. The author is not recom- mending any particluar book, as new ones come out all the time and old ones go out of print. Annualized Potential Return: The expected total return for a stock over a 3- to 5-year time frame. The Stock Charting System computes this value using the 3-5 year price goal and the annual dividend which you enter from the View screen for Individual Securities. See Chapter 11. The 3-5 year price goals can be obtained from Value Line Investment Survey or other research materials. Annualized Potential Return is shown on the bar graphs as a per- centage range, if the required data is available. The calcula- tion is equivalent to the expected Internal Rate of Return. GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 2 OF 9 BETA: A measure of the volatility of the price of a security; how the price of that security behaves in relation to the market itself. For example if a stock has a Beta of 1.25 and the market goes up 10%, the price of that stock may tend to go up 12.5%. Beta is calculated based on how the market and how individual stocks or funds have behaved in the past. Beta for stocks can be obtained from the Value Line Investment Survey. Beta for funds can be obtained from various fund guides. The Stock Charting System does not compute individual Betas. Crossover: A special type of oscillator that depicts the difference be- tween two moving averages, rather than between a moving average and its corresponding price. So-called because the two averages can cross each other, which causes the vertical bars to switch direction in relation to the zero reference line. See Oscilla- tor. GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 3 OF 9 Moving Average: The average of a specific number of consecutive prices of a security, which is computed each day or each week and then plotted as a continuous line on the bar chart. It shows the general trend of security prices by smoothing out the abrupt variations in individual prices each day or week. Each average calculation has the same period, that is, the number of prices included in that average calculation remains constant. There- fore each day or week a new price is added to the calculation, but the oldest price is omitted, thus the term "moving" average. The period (number of prices included in the average) determines the scope of the indicated trend. A longer period will show a longer-term trend; a shorter period will show a short-term trend. Popular moving average periods are 25 or 50 days (5 or 10 weeks) for short-term; 65 or 75 days (13 or 15 weeks) for intermediate- term; and 150 or 200 days (30 or 40 weeks) for long-term. You should keep in mind that a moving average is a LAGGING stat- istic - that is, it portrays a PAST trend, not a future one. GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 4 OF 9 Multiple: See Price/Earnings Ratio, which is sometimes called a "multiple". Offset: Pertains to Moving Averages. There is a school of thought that a moving average should be plotted in relation to the center of its period, rather than to the last element of its period as it is normally plotted. In the Stock Charting System, the Offset option in the Graphics Display Option screen causes all moving average lines to be offset horizontally to the left by half their corresponding periods. On-Balance Volume: A popular momentum indicator based on the daily sales volume of a security. It tends to show the strength of a trend rather than the trend itself. GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 5 OF 9 Oscillator: A histogram (a series of vertical bars emanating from a hor- izontal zero-reference line) showing the algebraic difference between security prices and their corresponding moving average values over time. If the difference is positive the bar goes up from the reference; if the difference is negative the bar goes down from the reference. It's another way of showing moving averages, and can be valua- ble if the bar chart appears cluttered because moving average values are close to their corresponding prices. Oscillators are significant in trading strategies that are based on the relationships between stock prices and corresponding mov- ing averages. Oscillators can display these relationships in a more obvious manner, especially on a monochrome screen. The author of the Stock Charting System is not a registered in- vestment advisor, and therefore cannot recommend any particular trading strategy. GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 6 OF 9 To plot an oscillator from a bar graph display on your screen, press the alphabetic "O" key. Then press C to select the Cross- over/oscillator function, and press G again. If you have selec- ed a single moving average, you will get an oscillator. If you have selected two or more moving averages, you will get a cross- over. The two plots are identified by the captions "osc" and "xover" on the bar chart. Price/Earnings Ratio or P/E Ratio: A stock's current price divided by the company's annual earnings. For example the stock of a com- pany that has earnings of $5.00 per year sells for $50.00. Its P/E ratio is 10. Usually, stocks that have high growth - such as technology stocks - tend to have high P/E ratios, and stocks that have lower growth - such as utility stocks - tend to have low P/E ratios. This is because one is usually willing to pay more per dollar of earnings for a high-growth company. P/E ratios as a whole tend to vary with the market, the economy, and the corpor- ate outlook. GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 7 OF 9 Relative Strength: A special type of graph which measures the relative strength of a selected security versus a "tagged" security. See Chapter 10 about how to "tag" a security, and Chapter 19 for information on how to display the relative strength chart. The "tagged" security is usually a composite index such as the S & P 500. The relative strength chart tells you how your stock or fund is doing, relative to a "standard" which depicts the performance of the market as a whole. However, the "standard" can be any security, which means you can analyze the strength of Compaq Computers relative to IBM corporation. Security Type: The general classification of securities. The types of securities recognized by the Stock Charting System are as follows, in the order in which they normally appear: Cash accounts, margin accounts, commerical paper, Treasury securities, municipal bonds, corporate bonds, preferred stocks, common stocks, mutual funds, warrants, put and call options, precious metals. GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 8 OF 9 Technical Analysis: The process of analyzing securities based only on the movements of their sales volumes and market prices. Tech- nicians (those who perform technical analysis) use programs like the Stock Charting System (and more complex tools), and pore over various kinds of graphs and charts. This is opposed to fundamental analysis, which is based on the corporate balance sheet and income statement and the nation's economy. Trading Band: A pair of lines plotted above and below their correspon- ding moving average, by a specified percentage of that average. For example a 10% trading band consists of two lines, one plotted 10% above the moving average and one plotted 10% below the moving average. The idea is to define the range of prices over which a security tends to trade, and to identify an excursion outside that range (sometimes called a "breakout"). Trading bands seem to work well when the Offset option is activated. GLOSSARY OF FINANCIAL TERMINOLOGY PAGE 9 OF 9 To specify a trading band when a bar chart is visible on the screen, press the alphabetic "O" key. Then type "F" and enter a percentage value for the moving average you want that trading band to apply to. Try 10% for a start, and then experiment! Yield: A security's annual dividend or interest expressed as a percent- age of the security's price. For example a stock that sells for $50.00 per share and pays an annual dividend of $2.50 is yield- ing 5% ($2.50 / $50.00 x 100). Utility and financial stocks tend to pay higher dividends; high-growth stocks tend to pay lower dividends (or none at all) because profits are re-invested in the business.