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What is a Loss?

A loss refers to reduction in the value of an investment, or in business terms, to having expenses outweigh revenues. In a company’s fiscal year, if their operating and total expenses outweigh their revenues, they are operating at a loss. If those companies are not supported by private capital and operate at a loss for too long, it can easily lead to bankruptcy or closure. Newer businesses often run at a net loss for the first few years, while they rush to build labor and capital infrastructure, with costs such as equipment, buildings, technology, employees, and rights. Continue reading...

What is Stop-Loss Order?

A stop-loss order is appended to a securities position being held long or short, and stipulates that the security is to be sold or bought if the price moves beyond the stop price, at which point the investor seeks to "cut his losses," or limit his potential exposure to losses. A stop-loss order will name a price below the market price on a long position and above the market price on a short position, at which point a sell order will be triggered for the long position and a buy order will be triggered to cover the short position, with the goal being to limit the potential losses to which an investor is exposed. Continue reading...

What Does Capital Loss Mean?

Capital Loss refers to a loss realized when a security is sold for less than it was purchased for. In stock trading, if an investor purchases stock ABC for $30 / share, and then sells the stock a few months later for $22 / share, they have realized an $8 / share capital loss. At the end of every year, as per U.S. tax policy, capital losses can be used to offset capital gains, so as to help an investor reduce their tax burden. A common year-end strategic approach is to “harvest” capital losses in an effort to offset any capital gains made from trading that year. Continue reading...

What is Profit and Loss (P&L) Statement?

A Profit and Loss Statement, also referred to as an “income statement,” is a corporate statement that summarizes the revenues, costs and expenses incurred by a company during a specific time period, such as a quarter or a fiscal year. The main difference between a P&L statement and a balance sheet is that the P&L is designed to show changes in line items over the period analyzed, versus a balance sheet which simply shows a comprehensive snapshot of a company’s asset and liabilities on a set date. Continue reading...

What is a Limit Order?

A Limit Order is a type of order to buy or sell a security, where the trader wants to set a specific price for the trade, or any price that’s better than the price set. From a buy and sell standpoint, a buy limit order would be designed to have the trade executed at the designated price, or any price lower than that. A sell order is just the opposite, where the trader hopes to execute the trade at a minimum set price. Limit orders typically have a period of time before they are canceled, if the designated price is not reached by a certain period. Continue reading...

What is a bear call spread?

A bear call spread seeks to make money on the sale of call options but does not believe the underlying security will increase. A Bear Call Spread strategy is utilized when one believes that the price of the underlying stock will go down (but not significantly) in the near future. It entails selling a call short at a lower price than you buy a long call, which is done to realize a net credit at the outset. Continue reading...

What are the IRA Contribution Limits?

The IRS adjusts the contribution limits year to year to accommodate cost-of-living adjustments. There are limits to how much money you can deposit annually into your IRA, and these limits are adjusted for cost-of-living by the IRS. These limits change at least every few years, so you will want to check the current IRS tables on their website. There are full deduction limits, and there are also limitations that may make some or all of these contributions non-deductible. Continue reading...

What is a Stop Limit Order?

A Stop-Limit Order basically automates the preferences of an investor or trader, to reduce exposure to price uncertainty even after a trade ticket is entered, by stipulating a price at which the search for a bid/ask price is to begin, but limiting the range of prices at which an order can actually be entered or executed. A Stop-Limit Order has two parts: the Stop Price and the Limit Price. The stop price is like an amendment or contract rider on a security that is held which stipulates that if the price of the security crosses the Stop price, the search for an agreeable price begins. Continue reading...

What are the Tax Implications for Making a Profit (or Loss) On a Stock?

Gains on stock investments will be taxable in the current year unless they can be offset with losses. Stocks that appreciate in value do not incur any tax liability while they are held, unless they pay dividends. Dividends will generally be taxable as ordinary income. For this article we will focus on capital appreciation instead of dividends. Capital appreciation can be considered long-term gains or short-term gains by the IRS upon the sale of the shares. A stock held for less than a year will incur short-term capital gains taxes, which are taxed at ordinary income rates. Continue reading...

What are the 401(k) Contribution Limits?

The contribution limits of 401(k)s are generally increased year-to-year and published by the IRS. As of 2016, an individual can contribute up to $18,000, or 100% of compensation, into their 401(k) account on a pre-tax basis. This is the employee’s contribution only, and does not include employer contributions. There is a $35,000 window that can hold employer contributions, which may contain matching contributions as well as a profit-sharing component for a total of $53,000 in employee/employer contributions per year. Continue reading...

What are the contribution limits for my Roth 401(k)?

Roth 401(k) contributions have the same limits as regular 401(k) contributions. The contribution limits for your Roth 401(k) are the same as the contribution limits for a traditional 401(k), which, in 2016, is $18,000, but these limits are adjusted upwards to account for inflation. If you’re over 50, you can add a catch-up contribution of $6,000 on top of the $18,000 for a total contribution of $24,000. Continue reading...

What is a vertical spread?

A Vertical Spread involves the strategy of buying and selling an equal number of options on the same underlying security with the same expiration date, but different strike prices. Vertical Spreads can be both bullish and bearish, depending on your view of the underlying security. If you use calls, you are constructing a Vertical Bull Spread, and if you’re using puts, you’re constructing a Vertical Bear Spread. Continue reading...

What is a Limited Liability Company (LLC)?

A limited liability company (LLC) establishes a separate entity from the sole proprietor or partners in a business which shields them from some of the liability associated with the business. An LLC is a business entity that creates a distinction between the business’s assets and liabilities and the assets and liabilities of the owner or partners. Sole proprietors and partnerships who do not file for this distinction leave themselves and all of their personal assets at risk, in the event of a lawsuit or bankruptcy. Continue reading...

What is a bull put spread?

A bull put spread is used when an investor thinks the price of a security is set to rise modestly. The strategy involves buying one put option on the security while simultaneously selling another put option at a higher strike price. A Bull Put Spread is usually a vertical spread, meaning the two options used have the same expiration date (and different prices). The lower-strike put option is bought and held long, while the higher-strike option is sold short. The short position sold will be at or just below the current market price for the security, and the long position will be at a lower strike price than the short position. Continue reading...

What is a put option?

A put option gives the owner of the option/contract the right to sell a stock at the strike price named in the contract. One kind of option is a put. A Put is a right to sell a particular asset (usually a stock) at a certain price (called the “strike price”) within a specified time-frame. The owner of the put contract doesn’t need to own the underlying stock. If the price of the stock drops below the strike price in the put, the owner of the put contract can buy the stock at the lower market price and immediately sell it at the higher strike price in the put contract. That is a speculative way to use a Put contract. Continue reading...

What is a straddle?

Straddles are options strategies that use both a call and put on the same underlying asset at the same strike price and expiration. The Straddle strategy involves either buying a call and a put with the same strike price and expiration, or selling a call and a put with the same strike price and expiration. The former is known as a Long Straddle, and the latter is known as a Short Straddle. Long straddles profit from significant price movement in either direction on the underlying asset. Continue reading...

What is a naked call?

A naked call is a type of option contract where the seller of a call does not own the underlying security, thereby exposing them to unlimited risk. Investors have the ability to “write” or sell options contracts as well as to buy them. The seller of a call option has opened a position in which the buyer is given the right to buy 100 shares of a stock at the strike price named in the contract. The seller – along with all other sellers of calls for that security – are the ones who must cover and close the open positions if the call owners exercise their options. Continue reading...

What is Capital Appreciation?

Capital appreciation is an increase in the value of an owned stock. Capital Appreciation occurs when the market price of a stock you own increases. For more information on stock prices, see "Why Does the Price of a Stock Change?" Until you decide to sell the shares, you have what is called Unrealized Gains on Capital Appreciation. Something to be wary of: having unrealized gains can be summed up with the old English proverb, "don't count your chickens before they hatch." Continue reading...

What is a ratio put spread?

A ratio put spread uses multiple put contracts in a certain ratio that makes them start off delta-neutral. Ratio put spreads are similar to regular spreads, but instead of using the same number of put contracts sold short as are held long, ratio spreads are set up with more of one than the other, in a ratio such as 2:1 or 3:2. The short contracts will have different strike prices than the long contracts. Continue reading...

What is 'buying on margin' and margin trading?

A margin trade is one where the trader uses other securities or cash as collateral, for a transaction in which he or she has not purchased the security outright. The broker acts as a lender. If your broker approves you for a margin account, you have the ability to purchase new securities “on margin” by using your current holdings as collateral, or by depositing 50% (or more depending on the broker) of the market price of the security into the margin account. Continue reading...