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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 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 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 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 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 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 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 ratio call spread?

Ratio call spreads are options strategies where the investor combines purchased calls and short calls at the same expiration but with different strike prices. A Ratio Call Spread starts off as a delta-neutral strategy, which means that even if you have two long calls and one short call, the sensitivity of your overall position to move in the underlying is equal whether it moves up or down by small amounts. 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 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 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 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...

How Does the Money in My 401(k) Get Invested?

Employers sponsoring 401(k) plans are required to give employees the information and ability to manage their own accounts, using the investment options provided to them by the plan administrator and custodian. Sometimes employers and 401(k) custodians will provide employees with simplified systems by which to determine what kinds of investments appeal to them, and how they would like to allocate their portfolio in pursuit of their retirement goals. 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 Book Value?

Book value is based on an accounting method that only considers certain factors, generally the more tangible or easily quantifiable ones, and excludes the more ethereal factors such as ‘goodwill.’ Book value can apply to an individual asset, a security, or a company, and tends to be pretty straightforward. Whatever value an asset is given on a balance sheet is its book value. For a tangible asset, this is calculated as the cost of the asset minus accumulated depreciation. Continue reading...

What is accommodation trading?

Accommodation Trading is when two traders enter into a non-competitive trade agreement which disregards the current market price for the securities being traded. The primary reason to engage in accommodation trading is for an investor to avoid taxes by harvesting more losses than actually occurred. One investor will buy shares from another investor for a price significantly below the market value so that the selling investor can report more losses. The partners will typically agree to allow the selling party to buy the shares back later at the same price. Continue reading...

What is Dividend Capture?

Dividend capture is a strategy similar to dividend arbitrage that seeks to reap incremental gains somewhat reliably around the ex-dividend date of a stock. The investor seeks to benefit from the fact that stock prices don’t always go down as much as they should on the ex-dividend date, so by selling quickly at that point, the investor may still get a small gain from the dividend that will still be paid to him or her. Dividend capture is a strategy that plays on slight inefficiencies in prices around the ex-dividend date. Continue reading...

What is Total Return?

Total Return is the measure of all appreciation and interest as well as dividends and other distributions from an investment. Often computations of return will only consider appreciation, and it can be an easy mistake to make when looking at performance data at times. When a stock pays significant and consistent dividends, it needs to be factored in to the computation of total return. This adds a significant compounding effect to the investment’s overall performance, but if you just looked at the sheets that said it had a 4% return and a 2% dividend yield, you would be missing the most important part. Total return can be calculated for different kinds of investments or an entire portfolio, and is often done on an annual basis once all distributions have been made. Continue reading...