Also known as a contract’s value, notional value is calculated by multiplying the size of the contract by the current price
A 401(k) plan is a defined-contribution plan where employees can make contributions from their paychecks either before or after tax, depending on the plan selections. The contributions go into 401(k) accounts, with the employees often choosing the investments based on the plan selections.
Refers to its number in the Internal Revenue Code. A 529 plan is a tax-advantaged investment vehicle designed to encourage saving for the future higher-education expenses of a designated beneficiary.
The difference between the adjusted basis immediately after purchase and the AIP for a debt instrument purchased below SRPM. Acquisition premium is used to offset against OID and reduces the amount of OID reported as income. While it doesn’t actually adjust your basis, it does reduce the OID that increases your basis by reducing the amount of OID you must report as income – it has an indirect affect.
The price of a debt instrument that determines the Original Issue Discount (OID) allocable to a specific period. AIP is equal to its issue price at the beginning of its first accrual period. After that, it is the sum of the AIP and all cumulative accrued OID. As you can see in the graphic above, OID is a form of interest equal to the excess of a debt instrument's SRPM over its issue price.
The advance/decline line is a market breadth indicator that looks at the cumulative number of advances. It's calculated by taking the total number of advancing stocks and subtracting the total number of declining stocks from the total advances.
The advance/decline ratio reflects the number of shares rising compared with those falling on a given day. In technical analysis, A/D moving averages can be used to smooth out daily market gyrations and provide overbought and oversold signals.
Alpha refers to a measure of performance on a risk-adjusted basis as compared with a benchmark index. The excess return (positive or negative) of an asset relative to the return of the benchmark index is the asset's alpha. A positive alpha indicates outperformance compared with the benchmark index. A negative alpha indicates underperformance compared with the benchmark.
An option contract that can be exercised at any time between when you purchase it and when the contract expires.
An annuity is a contract between an investor and insurance company designed to provide a steady income stream to the investor, usually after retirement. Annuity investors pay regular premiums to the insurer, then, once the contract is annuitized, the investor receives regular payments for a set period of time. Annuities can grow tax-deferred, meaning investors pay no taxes on the earnings until they receive payments or make withdrawals.
The simultaneous purchase and sale of identical or equivalent financial instruments in order to benefit from a discrepancy in their price relationship.
Assignment happens when someone who is short a call or put is forced to sell (in the case of the call) or buy (in the case of a put) the underlying stock. For every option trade there is a buyer and a seller; in other words, for anyone short an option, there is someone out there on the long side who could exercise.
An option whose strike is “at” the price of the underlying equity. Like out-of-the-money options, the premium of an at-the-money (ATM) option is all time value.
A straddle is an options strategy that involves the simultaneous purchase (or sale in a short straddle) of a call option and a put option on the same underlying asset, at the same strike price and expiration. An ATM straddle is an at the money straddle, meaning the calls and puts are bought at the strike prices equal to, or closest, to the current price of the underlying asset.
A measure of volatility that takes into account an equity’s range in prices between its closing prices over a period of time (typically 14 days).
Also known as the iShares S&P 500 VIX Short-Term Futures ETN, this exchange-traded note tracks the CBOE VIX futures.
BASIC EPS, which doesn’t account for the dilutive effect of convertible securities, is a rough measurement of the amount of a company’s profit that can be allocated to one share of its stock. Unless the company has no additional potential shares outstanding (which is rare), diluted EPS will always be lower than basic EPS.
The difference in futures prices in different expirations, or the cash (“spot”) price of the underlying product and the futures price.
Basis points (BPS) are units that equal 1/100th of 1% and are commonly used to calculate changes in interest rates. For example, a change from 3.50% to 3.75% is an increase of 25 BPS.
Beta describes how much a stock changes if an index changes 1%. It's often calculated based on the S&P 500. If a given stock has a beta of 1.25, and the S&P 500 moves up 1%, the stock would be expected to move up 1.25%.
Standardizing a portfolio’s positions into one unit.
The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight. Developed by Nassim Nicholas Taleb to explain why proliferation of high-profile, unpredictable but outside-the-normal events happen, and why they’re hard to predict.
The option-pricing formula published by Fischer Black and Myron Scholes, which requires five inputs (stock price, options strike, interest rate, time to expiration, and volatility) to arrive at a price.
A chart indicator in which lines, or bands, are typically plotted two standard deviations above and below a simple moving average. Because standard deviation is a measure of volatility, Bollinger Bands adjust to the market conditions. When prices become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average). Technical traders often view tightening of the bands as an early indication that the volatility is about to increase sharply.
A bonds adjusted basis immediately after purchase is greater than the total of all amounts payable on the debt instrument after the purchase date, other than qualified stated interest.” Layman’s terms: You paid more than the SRPM – hence the word “premium.”
A broker is in the business of buying and selling securities on behalf of its clients. A dealer buys and sells securities for its own account. A broker-dealer does both. U.S. regulators such as the Securities and Exchange Commission typically refer to stock brokerage firms as broker-dealers because a majority of them may serve both functions.
Lend to or invest in small companies; have REIT-like structures, meaning at least 90% of taxable income is paid out as dividends.
Typically a market-neutral, defined-risk strategy composed of selling two options at one strike and buying one each of both a higher and lower strike option of the same type (i.e., calls or puts). The strategy assumes the underlying will remain relatively unchanged during the life of the trade, in which case, as time passes and/or volatility drops, the combined short options premiums exhibit more decay than the combined long options premiums, resulting in a profit when the spread can be sold for more than its original debit (which is also its maximum loss).
The amount of money available in a margin account to buy stocks or options. Buying power is determined by the sum of the cash held in the brokerage account and the loan value of any marginable securities in the account without depositing additional equity.
A covered call position in which stock is purchased and an equivalent number of calls written at the same time.
A defined-risk spread strategy constructed by selling a short-term option and buying a longer-term option of the same type (i.e., calls or puts). The goal: As time passes, the shorter-term option typically decays faster than the longer-term option and can be profitable when the spread can be sold for more than you paid for it. The risk is typically limited to the debit incurred.
A call option gives the owner the right, but not the obligation, to buy shares of stock or other underlying asset at the options contract’s strike price within a specific time period. The seller of the call is obligated to deliver, or sell, the underlying stock at the strike price if the owner of the call exercises the option. In the case of an index option, it’s a cash-settled transaction with no underlying index changing hands.
A bullish strategy that involves buying and selling options to create a spread with limited loss potential and mixed profit potential.
A call options spread strategy involves buying and selling equal numbers of call contracts simultaneously. Spread strategies can also entail substantial transaction costs, including multiple commissions, which may impact any potential return.
The simultaneous purchase of one call option and sale of another call option at a different strike price, in the same underlying, in the same expiration month.
Candlestick charting is a technical analysis system that originated in Japan and became popular in the West. On a candlestick chart, a narrow line (the shadow or “wick” of the candle) shows the day's price range, while a wider body marks the area between the open and the close. Candlesticks are favored by many traders, in part because the technique can help traders decide when they see price inflection points and opportunities over relatively short time frames, such as eight to 10 trading sessions.
A stock, option, mutual fund or ETF which is purchased with the intent of selling for a profit; The profit or loss is taxed only when the asset is sold or produces income, such as interest or dividends.
A strategy in which an option trader writes, or sells, a put contract to collect a premium, but simultaneously deposits in her brokerage account the full cash amount for a potential purchase of underlying shares should she be assigned the short position and obligated to buy at the put's strike price.
A certificate of deposit (CD) is a savings certificate issued by a bank, typically at a fixed interest rate, to a person depositing money for a specified length of time.
Cloud computing involves networks of servers where people can store and transmit data in place of the more traditional hard drive. Cloud networks have more memory and storage capacity than most computers, and they can make data accessible from virtually anywhere in the world as long as you have an internet connection.
A collar combines the writing, or selling, of a call option with the purchase of a put at the same expiration. Typically,
this involves a call with a strike price above that of the underlying stock and a put with a strike below the stock. The strikes create “floor” and “ceiling” prices, “collaring” the underlying stock in between. In return for accepting a cap on the stock’s upside potential, the investor receives a minimum price at which the stock can be sold during the life of the collar.
The Consumer Price Index (CPI), which is tracked by the U.S. Labor Department, reflects average price changes over time for a basket of goods and services, including food, gasoline, rent, apparel, and medical care.
Used to measure how closely two assets move relative to one another. A correlation of +1 means both assets tend to move in tandem, while -1 means both assets move opposite of each other.
The original value of an asset for tax purposes (usually the purchase price) adjusted for stock splits, dividends, and return of capital distributions. Capital gain is then equal to the difference between the asset’s cost basis and the sales price.
The cost to you to hold an asset, such as an option of futures contract. In the case of options, the cost of carry relates to dividends paid out by the underlying asset and the prevailing interest rates.
A limited-return strategy constructed of a long stock and a short call. Ideally, you want the stock to finish at or below the call strike at expiration. If the stock price settles above the strike price, you’d have your stock called away at the short call strike. You’d keep your original credit from the sale of the call as well as any gain in the stock up to the strike. Breakeven on the trade is the stock price you paid minus the credit from the call and transaction costs.
A spread strategy that increases the account's cash balance when established. A bull spread with puts and a bear spread with calls are examples of credit spreads.
A spread strategy that decreases the account's cash balance when established. A bull spread with calls and a bear spread with puts are examples of debit spreads.
A measure of an options contract’s sensitivity to a $1 change in the underlying asset. All else being equal, an option with a 0.50 delta (for example) would gain $0.50 per $1 move up in the underlying. Long calls and short puts have positive (+) deltas, meaning they gain as the underlying gains in value. Long puts and short calls have negative (–) deltas, meaning they gain as the underlying drops in value.
A position or options portfolio in which the total net deltas of all the legs of every position combined equal zero. For example, an at-the-money straddle is a delta-neutral position because the call, carrying a delta of 0.50, offsets the put, with a delta of -0.50, for a net delta of zero. Because delta is always changing as the market moves, market makers and option traders will often reduce (“hedge”) their deltas with an offsetting position, such as long puts against long calls or long stock, and short puts against short stock.
Rollover typically refers to migration from two types of plans, while a transfer describes IRA-to-IRA.
For mutual funds and exchange-traded funds (ETFs), the 12-month distribution yield is the ratio of all the distributions (typically interest and dividends) the fund paid over the previous 12 months to the current share price (or Net Asset Value) of the fund.
Dividend yield is a stock’s annual dividend divided by its current share price. As a stock’s price declines, its dividend yield increases, and vice versa. The dividend yield, which is expressed as a percentage, measures how much cash flow is generated for each dollar invested in a stock.
Investing a fixed dollar amount in a fund on a regular basis such that more fund shares are bought when the price is lower and fewer are bought when the price is higher. The goal is to have a lower average purchase price than would be available on a random day.
In bonds and other fixed-income securities, duration is the sensitivity of the security's price relative to a 1% change in interest rates. Duration is measured in years; the higher the duration, the more a security's price is expected to drop as interest rates rise.
Earnings per share, or EPS, is calculated by dividing a company’s profit by the number of shares outstanding. Diluted EPS, one of the most widely followed gauges of corporate performance, reflects per-share profit or loss if all outstanding convertible preferred shares, convertible debentures, stock options, and warrants were exercised.
An acronym for earnings before interest, taxes, depreciation, and amortization. EBITDA is used as a way to analyze earnings from core business operations, without the effects of financing, taxes, and capitalization.
Released quarterly by the U.S. Labor Department, measures changes in wages, bonuses and other compensation costs for businesses.
Environmental, social, and governance are three factors used to measure the impact of a company’s business practices regarding sustainability. Some mutual funds and ETFs offer what’s known as ESG funds, which are structured to target companies with socially responsible practices.
An exchange-traded fund (ETF) is typically listed on an exchange and can be traded like stock, allowing investors to buy or sell shares aimed at following the collective performance of an entire stock or bond portfolio or an index as a single security. ETFs are subject to risks similar to those of stocks, including short selling and margin account maintenance.
Describes a stock whose buyer does not receive the most recently declared dividend. Dividends are payable only to shareholders recorded on the books of the company as of a specific date of record (the "record date"). If you buy the stock any time after the record date for a particular dividend, you won't receive that dividend.
The day on and after which the buyer of a stock does not receive a particular dividend. This date is sometimes referred to simply as the ex-date and can apply to other situations beyond cash dividends, such as stock splits and stock dividends. On the ex-dividend date, the opening price for the stock will have been reduced by the amount of the dividend but may open at any price due to market forces.
An options contract gives the holder the right but not the obligation to buy or sell the underlying security at the strike price, on or before the option's expiration date. When the holder claims the right (i.e. takes a long or short position in the underlying security) that's known as exercising the option.
Expected, or forward, P/E uses the average analyst per-share profit estimate for the coming 12 months; many market professionals favor this version, which is considered more of a leading indicator that can foreshadow share price moves.
An exponential moving average (EMA) is a technical indicator that’s similar to a simple moving average, except that it gives a greater weighting to more recent data in the sample.
The FAANGs (or FANGs) refer to a group of technology-based companies whose shares performed well in the late 2010s. Companies typically included in the FAANGs include Facebook (FB), Amazon (AMZN), Apple, (AAPL), Netflix (NFLX), and Google parent Alphabet (GOOG, GOOGL).
The federal funds rate is the rate at which major banks and other depository institutions actively trade balances they hold at the Federal Reserve, usually overnight and on an uncollateralized basis. One of the central bank’s primary policy tools, the rate is linked to borrowing costs across the financial system, making it among the most influential and widely followed interest rates in the world. The Fed adjusts the rate to stimulate or rein in the economy (and prevent excess inflation).
The branch of the U.S. Federal Reserve that determines the direction of monetary policy, primarily through adjustments to benchmark short-term interest rates. It’s composed of a seven-member board of governors and five reserve bank presidents, and it meets eight times a year.
A Fibonacci sequence (1, 2, 3, 5, 8, 13, 21, 34, etc.) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8%, which is a popular Fibonacci retracement number. The inverse of 61.8 percent is 38.2 percent, also used as a Fibonacci retracement number. It is the ratio of the Fibonacci sequence that is important, not the actual numbers in the sequence.
Financial advisor is a broad term for a professional such as a Certified Financial Planner (CFP) or Registered Investment Advisor (RIA) who provides advice or guidance in exchange for compensation. Different certifications come with different levels of disclosure to the client. For example, many financial professionals operate under a standard of suitability, meaning they must assess whether an investment may be in line with a client’s objectives and risk tolerance. RIAs operate under a stricter fiduciary standard.
A fixed-income security is an investment in which an issuer (or borrower) is required to make periodic payments of a specific amount, or specific rate, at regular intervals. Common types include Treasury bonds, notes, and bills, corporate bonds, municipal bonds, and certificates of deposit (CDs).
A flag is a technical charting pattern where prices fluctuate within an increasingly narrow range (resembling a flag with a “mast”) and mark a consolidation before the previous move resumes. Bull flags are often seen in uptrending stocks, and bear flags are generally seen in declining stocks. Chartists watch for buy and sell signals when the price penetrates trendlines of the flag.
Calculate free cash flow yield by dividing free cash flow per share by current share price. You can also divide a company’s overall cash flow by its market capitalization.
Fundamental analysis attempts to derive the value of a stock or other security by analyzing a company's financial statements, management, competitive environment, overall economic conditions, and other factors. Some popular fundamental indicators include the price-to-earnings (P/E) ratio, earnings per share, and price/earnings-to-growth ratio.
A futures contract is an agreement to buy or sell a predetermined amount of a commodity or financial instrument at a certain price on a stipulated date.
A measure of how much of the delta of an option is expected to change per $1 move in the underlying.
Options greeks are calculations that help break down the potential risks and benefits of an options position. They include delta, gamma, theta, vega, and rho.
Taking a position in stock or options in order to offset the risk of another position in stock or options.
A statistical term that says the variability of a variable is unequal across the range of values of a second variable that predicts it. A scatterplot of these variables will often create a cone-like shape, as the scatter (or variability) of the dependent variable (DV) widens or narrows as the value of the independent variable (IV) increases. The inverse of heteroscedasticity is homoscedasticity, which indicates that a DV's variability is equal across values of an IV.
Also called actual or realized volatility, historical volatility is computed as the annualized standard deviation of prices of a security over a specific period of past trading days, such as 20, 30, or 90 days. Standard deviation is a mathematical measure used to quantify the amount of variation (dispersion) of a set of data values. Historical volatility is based on actual results, whereas implied volatility is an estimate of future price movement.
A health savings account (HSA) is a savings account that offers tax advantages for people enrolled in an approved high-deductible health plan. Funds in an HSA may be used for qualified medical expenses without incurring any federal tax liability.
The market’s perception of the future volatility of the underlying security directly reflected in the options premium. Implied volatility is an annualized number expressed as a percentage (such as 25%), is forward-looking, and can change.
Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the stock price is above the strike price. A put option is ITM if the stock price is below the strike price. For calls, it’s any strike lower than the price of the underlying equity. For puts, it’s any strike that’s higher.
An income statement measures a company’s financial performance over a specific accounting period, providing a summary of how the business incurs revenues and expenses through both operating and non-operating activities. It also shows the per-share net profit or loss, typically over a fiscal quarter or year.
Account into which a person can contribute up to a specific amount every year. The growth on IRA funds is tax-deferred and, depending on personal circumstances, contributions may be tax deductible (withdrawals prior to age 59 1/2 may be assessed a 10% IRS penalty). Withdrawals from traditional IRAs are taxed at current rates.
Inflation refers to a general increase in prices and a decrease in the purchasing value of money. Inflation is commonly measured in two ways. Core inflation represents long-term price trends by excluding certain volatile items such as food and energy. Headline inflation represents the total inflation within the economy.
Initial public offering (IPO) is the process through which private companies, often controlled by a single person or a small number of people, first sell shares to outside investors (the public). Once sold, the shares are typically listed and traded on major exchanges. A company’s uses for IPO proceeds include expanding the business, funding acquisitions, and rewarding existing owners and management.
The Internal Revenue Service (IRS) is a federal agency responsible for the collection and enforcement of taxes. The IRS was established in 1862 by President Lincoln and operates under the authority of the U.S. Treasury Department. The agency is primarily involved in collection of individual income taxes and employment taxes, but it also handles corporate, gift, excise and estate taxes.
The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business. This includes both tangible and intangible factors and may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value, hoping to find investments where the true exceeds current market value.
An options strategy that is created with four options at three consecutively higher strike prices. The two options located at the
middle strike create a long or short straddle (one call and one put with the same strike price and expiration date) depending on whether the options are being bought or sold. The “wings” (options at the higher and lower strike prices) of the strategy are created by the purchase or sale of a strangle (one call and one put at different strike prices but the same expiration date). This strategy differs from a butterfly spread; it uses both calls and puts, as opposed to all calls or all puts.
A defined-risk short spread strategy constructed of a short put vertical and a short call vertical. You assume the underlying will stay within a certain range (between the strikes of the short options). The goal: As time passes and/or volatility drops, the spreads can be bought back for less than the credit taken in or expire worthless, resulting in a profit. The risk is typically limited to the largest difference between the adjacent and long strikes minus the total credit received.
High-yield bonds have a lower credit rating than investment-grade corporate debt, Treasuries and munis. Because of the greater risk of default, so-called junk bonds generally pay a higher yield than investment-grade counterparts.
A volatility-based technical indicator that uses average true range to create envelopes above and below an exponential moving average.
Large-capitalization stocks are typically companies with market values (share price multiplied by number of shares outstanding) greater than $8 billion to $10 billion.
A leveraged ETF uses financial derivatives and debt in an attempt to amplify the returns of an underlying index, such as the S&P 500. For example, a leveraged ETF with a 2:1 ratio matches each dollar of investor capital with an additional dollar of debt. If the underlying index returns 1% in one day, the ETF in theory returns 2%; however, they may experience greater losses than expected.
A limit order indicates the highest price you're willing to pay for a security, or the lowest price you're willing to accept to sell a security. Your order will be executed at your designated price or better. This helps protect your order from sudden volatility, but it also means you'll only buy or sell the security if it reaches the price you're seeking.
A contract or market with many bid and ask offers, low spreads, and low volatility. In a liquid market, it is easier to execute a trade quickly and at a desirable price because there are numerous buyers and sellers. In a liquid market, changes in supply and demand have a relatively small impact on price.
A defined-risk, bullish spread strategy, composed of a long and a short option of the same type (i.e. calls). Long verticals are purchased for a debit at the onset of the trade. The risk of a long vertical is typically limited to the debit of the trade.
Gives the owner the right, but not the obligation, to sell shares of stock or other underlying assets at the option’s strike
price within a specific time period. The put seller is obligated to purchase the underlying at the strike price if the owner of the put exercises the option. In the case of an index option, it’s a cash-settled transaction with no underlying asset changing hands.
The simultaneous purchase of one put option and sale of another put option at a lower strike price, in the same underlying, in the same expiration month.
A market-neutral, defined-risk position composed of an equal number of long calls and puts of the same strike price. The strategy assumes the market will break out one way or another, in which case a profit occurs when one side of the trade gains more than the other side loses. Breakeven points are calculated by adding and subtracting the total debit to and from the strike price of the options.
A defined-risk, directional spread strategy composed of a long options and a short, further out-of-the-money option of the same type (i.e. calls or puts). Long verticals are purchased for a debit. Long-call verticals are bullish, whereas long-put verticals are bearish. The risk of a long vertical is typically limited to the debit of the trade.
A defined-risk, directional spread strategy, composed of a long option and a short call option expiring in the same month. Long verticals are bullish and purchased for a debit. The risk of a long vertical is typically limited to the debit of the trade.
Structurally, LEAPS are no different than short-term options, but the later expiration dates offer the opportunity for long-term investors to gain exposure to prolonged price changes without needing to use a combination of shorter-term option contracts. The premiums for LEAPs are higher than for standard options in the same stock because the increased expiration date gives the underlying asset more time to make a substantial move.
Moving average convergence divergence (MACD) is an oscillator in which entry and exit signals trigger when the indicator moves above or below the zero line. When the indicator is below the zero line and moves above it, this is a bullish signal. A move below the line is a bearish signal.
Margin is borrowed money that’s used to buy stocks or other securities. In margin trading, a brokerage firm lends an account owner a portion of the purchase price (typically 30% to 50% of the total price). The loan in the margin account is collateralized by the stock, and if the value of the stock drops below a certain level, the owner will be asked to deposit marginable securities and/or cash into the account or to sell/close out security positions in the account.
A margin call is issued when your account value drops below the maintenance requirements on a security or securities due to a drop in the market value of a security or when you exceed your buying power. Margin calls may be met by depositing funds, selling stock, or depositing securities. TD Ameritrade may forcibly liquidate all or part of your account without prior notice, regardless of your intent to satisfy a margin call, in the interests of both parties.
The total value, in dollars, of a company’s outstanding shares calculated by the number of shares by the current share price. For example, if XYZ is trading at $100 per share and there are 50 million shares outstanding, its market cap would be $5 billion.
For bonds with OID, the difference between the AIP of the security and the adjusted basis paid for the security.
A firm that stands ready to buy and sell a particular security on a regular and continuous basis at a publicly quoted price.
A style of trading in which a trader attempts to capture profits from a stock or index trading within a specific range. Though some market neutral strategies, like the straddle, start off as delta neutral, thats not always the case.
A trading order placed with a broker to immediately buy or sell a stock or option at the best available price.
Mark-to-market or fair value accounting refers to accounting for the “fair value” of an asset or liability based on the current market price, or for similar assets and liabilities, or based on another objectively assessed “fair” value.
The simultaneous purchase of stock and put options representing an equivalent number of shares.
The investor or group of investors are the limited partner that provides the capital and receives periodic income distributions from the MLP’s cash flow. On the other side, the general partner is the party responsible for managing the MLP’s affairs and receives compensation that is linked to the venture’s performance.
Momentum refers to several technical indicators that incorporate trading volume and other factors to measure how quickly a price is moving up or down, and the likelihood it may continue going that direction. In markets that are in the process of changing direction, momentum readings often “diverge,” flattening out or turning the opposite way.
Broadly refers to the total amount of currency and other liquid instruments in a country’s economy at a particular time; this can include cash and checking and savings account balances.
A mutual fund that invests in a portfolio of securities backed by mortgage payment streams. These may include residential or commercial properties, or both. Some are issued by government-backed institutions, such as Ginnie Mae, Fannie Mae and Freddie Mac, while others are considered “non-agency” and are not backed by the government.
A technical indicator that’s calculated by adding the closing price of a stock or other security over a specific period of time and dividing the total by the appropriate number of trading days. For example, a 20-day moving average is the average closing price over the previous 20 days.
Municipal bonds are issued by state or local governments to raise money to pay for special projects, such as building schools, highways, and sewers. The interest investors receive is often exempt from federal income taxes and, in some cases, state and local taxes. Interest may be subject to the alternative minimum tax (AMT).
A mutual fund is a professionally or passively managed financial security that pools assets from multiple investors in order to purchase stocks, bonds, or other securities.
A trading position where the seller of an option contract does not own any, or enough, of the underlying security to act as protection against adverse price movements.
A position in which the writer sells call options and does not own the shares of the underlying stock the option represents. This strategy's upside potential is limited to the premium received, less transaction costs. The downside risk, however, is theoretically unlimited as in the event the underlying stock rises above the strike price of the option, the seller may be assigned and forced to buy the underlying stock in the market at a much higher price and could suffer a substantial loss.
A position in which the writer sells put options and does not have the corresponding short stock position or enough cash deposited to cover the exercise of the put. This strategy's upside potential is limited to the premium received, less transaction costs or acquiring the underlying stock at a net cost below the current market value. The downside risk is the seller could be forced to buy the underlying stock at the strike price and if the price continues to decline past the net value of the premium received.
The notation of an option's delta with a negative sign (-). Negative deltas reflect the idea that the option position will increase in value as the underlying falls in price, as would be the case of a long put or short call.
Short options have negative vega (short vega) because as volatility drops, so do their premiums, which can enhance the profitability of the short option.
Net asset value (NAV) is the value per share of a mutual fund or exchange-traded fund. NAV is calculated by taking the market value of the fund's assets less the fund's liabilities and dividing by the total number of outstanding shares.
Net income is calculated by taking revenue and subtracting the costs of doing business, as well as depreciation, interest, taxes and other expenses. Used to determine earnings per share, net income is a key long-term performance measure and is often referred to as the “bottom line,” since it is listed at the bottom of the income statement.
A position which has no directional bias. Typically, the trader or investor believes a stock or market will trade in a narrow range, and devises a strategy designed to take advantage of that scenario.
Operating income is profit realized after taking out operating (or recurring) expenses, such as the cost of goods sold, power and wages. Sometimes referred to as earnings before interest and taxes (EBIT), operating income is used to calculate operating margin, a closely followed metric of how efficiently a company turns sales into profits.
According to the IRS, OID is a form of interest. It is the excess of a debt instrument's stated redemption price at maturity over its issue price.
An oscillator is used in technical analysis to determine whether a security might be overbought or oversold. Oscillators help identify changes in momentum and sentiment.
Describes an option with no intrinsic value. A call option is out of the money (OTM) if its strike price is above the price of the underlying stock. A put option is OTM if its strike price is below the price of the underlying stock.
Overbought is a technical condition that occurs when the price of a stock or other asset is considered too high and susceptible to a decline. It’s important to keep in mind that this is not necessarily the same as a bearish condition. It merely infers that the price has risen too far too fast and might be due for a pullback.
Overbought is a technical condition that occurs when the price of a stock or other asset is considered too high and susceptible to a decline. It's important to keep in mind that this is not necessarily the same as a bearish condition. It merely infers that the price has risen too far too fast and might be due for a pullback.
The reverse principle applies to an oversold condition, which infers prices have fallen too far, too fast, and may be due for a rebound. Similarly, a stock that appears oversold isn’t necessarily in a bullish position.
Profit and loss of the aggregate total of all gains and losses over a specific period of time (e.g., day, month, year). Often confused with ROI, which is just the return on investment of a single trade or position.
Buying one asset and selling another in the hopes that either the long asset outperforms the short asset or vice versa. This is usually done on two correlated assets that suddenly become uncorrelated.
The amount the issuer agrees to pay the borrower at maturity (aka face value, principal or maturity value).
Defined as anyone who executes four or more “day trades” within a rolling five business day period, provided that the number of day trades represents more than 6% of the customer’s total trades in the margin account for that same five business-day period. Pattern day traders must have at least $25,000 in their accounts and can only trade in margin accounts.
Similar to the CPI, tracks price changes for several common goods and services; the PCE is included in quarterly Gross Domestic Product reports released by the U.S. Commerce Department.
A U.S. Department of Education program, provide funds to eligible undergraduate and post-graduate students depending on their financial need, school costs, and other factors. Unlike student loans, Pell Grants do not need to be paid back. The maximum grant in 2013–14 was $5,645, according to the Education Department.
When the stock settles right at the strike price at expiration, in which case, you could be unwillingly assigned an unhedged stock position.
Delta is a measure of an option's sensitivity to a $1 change in the underlying asset. Long calls and short puts have positive (+) deltas, meaning they gain as the underlying gains in value.
A position that benefits from the time decay (theta) an option experiences as time passes.
Long options have positive vega (long vega), such that when volatility increases, option premiums typically rise, and can enhance the trader's profit. Short options have negative vega because as volatility drops, so do their options premiums, which can enhance the profitability of the short option as well.
Most spread traders use the commonly accepted ratios, which don’t change very often. The common ratios used for each spread are:
Premium is the price of an options contract. It’s paid to the seller of the option. The option premium is primarily affected by the difference between the stock price and the strike price, the time remaining for the option to be exercised, and the volatility of the underlying stock, along with other factors.
The presidential cycle refers to a historical pattern where the U.S. stock market during the last two years of a president’s term tends to outperform the first two years. In theory, a new president’s initial efforts are aimed more at political interests, while later in the term a president pushes economy boosting measures, such as tax cuts and job creation.
The price-to-book (P/B) ratio measures the market capitalization of a company with the stated value of its net assets.
P/B ratio = Stock price / (Total assets minus Intangible assets and liabilities).
The price-to-earnings (P/E) ratio is the market value per share divided by earnings per share (EPS). For example, a stock trading at $43 with earnings over the last 12 months of $1.95 per share would have a P/E ratio of 22.05 ($43/$1.95). EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected, or forward, P/E).
Market price of a stock divided by the sum of active users in a 30-day period. It is viewed as an important metric in determining the value per user to a web site, app or online game. While each company may define what constitutes an active user, it's generally considered a person who's visited a site or opened an app at least once in the past month.
A graphical presentation of the profit and loss possibilities of an investment strategy at one point in time (Usually option expiration), at various stock prices.
A protective collar combines the writing, or selling, of a call option with the purchase of a put at the same expiration. Typically, this involves a call with a strike price above that of the underlying stock and a put with a strike below the stock. The strikes create “floor” and a “ceiling” prices, “collaring” the underlying stock in-between. In return for accepting a cap on the stock's upside potential, the investor receives a minimum price at which the stock can be sold during the life of the collar.
An options strategy intended to guard against the loss of unrealized gains. The put option costs money, which reduces the investor's potential gains from owning the security, but it also reduces the risk of losing money if the underlying security declines in value.
Gives the owner the right, but not the obligation, to sell shares of stock or other underlying assets at the options contract's strike price within a specific time period. The put seller is obligated to purchase the underlying at the strike price if the owner of the put exercises the option. In the case of an index option, it's a cash-settled transaction with no underlying index changing hands.
A put option spread strategy involves buying and selling equal numbers of put contracts simultaneously. Spread strategies can also entail substantial transaction costs, including multiple commissions, which may impact any potential return.
The simultaneous purchase of one put option and sale of another put option at a different strike price, in the same underlying, in the same expiration month.
The put-call ratio is a sentiment indicator based on the number of put options traded versus the number of calls. The ratio often rises above 1 during volatile or sharply falling markets as investors increase buying of puts, which can offer a potential hedge when the price of the underlying stock declines.
The price relationship of puts and calls of the same class, such that a combination of these puts and calls will create the synthetic equivalent of a stock position. For example, a combination of a short 50-strike put, with a long 50-strike call of the same expiration and same underlying, has the same risk-return profile as the underlying stock position.
Qualified Longevity Annuity Contracts (QLACs) are one type of annuity that can offer flexibility and retirement planning choices for a portion of the assets held in certain qualified plans and IRAs. They’re a type of deferred income annuity (DIA).
A plan that meets requirements of the Internal Revenue Code and so is eligible to receive certain tax benefits.
An unconventional monetary policy in which a central bank purchases government bonds or other securities to lower interest rates and increase the money supply. The U.S. Federal Reserve’s QE program that began in 2008 involved buying about $85 billion worth of securities each month.
Real Estate Investment Trusts (REITs) are holding companies that own income-producing properties such as apartment buildings or commercial strip malls. REITs typically pay out most or all of their taxable income each year to their shareholders as dividends; the IRS requires them to pay out at least 90% annually.
Formally known as Regulation T, it’s the initial margin requirement set by the Federal Reserve Board. According to Reg T requirements, you may borrow up to 50% of marginable securities that can be purchased (such as most listed stocks).
The Relative Strength Index (RSI) is a technical analysis tool that measures the current and historical strength or weakness in a market based on closing prices for a recent trading period. The RSI is plotted on a vertical scale from 0 to 100. A reading above 70 is considered overbought, while an RSI below 30 is considered oversold.
A required minimum distribution (RMD) is the amount that traditional, SEP, and SIMPLE IRA owners and qualified plan participants must begin withdrawing at age 72 (70.5 for anyone born before July 1, 1949). RMD amounts must then be recalculated and distributed each subsequent year.
A Reserve Currency, such as the U.S. dollar, is held in large quantities by central banks and financial institutions, such as the International Monetary Fund, as an acceptable means of international payment.
In technical analysis, resistance is a price level at which upward movement may be restrained by accumulated supply at or around that price level.
The measure of the expected change in change in the theoretical value of an option for a 1% change in interest rates.
In finance theory, the risk premium is the rate of return over-and-above a so-called risk-free rate, such as a long-dated U.S. Treasury security. For example, if a security's theoretical return is 6%, and the risk-free rate is 2%, the risk premium would be 4%. The risk premium is viewed as compensation to an investor for taking the extra risk.
A trading action in which the trader simultaneously closes an open options position and creates a new options position at a different strike price, different expiration, or both. Variations of this include rolling up, rolling down, rolling out, and diagonal rolling.
Similar to traditional IRAs in most respects, except contributions are not tax deductible and qualified distributions are tax-free.
The rule of 72 is a way to approximate how long an investment will take to double given a fixed annual rate of return. Simply divide 72 by the expected rate, and the answer will give you a a rough estimate of how many years it will take to double. For example, an investment return that is expected to earn 6% would double in about 12 years (72/6 = 12).
A trading strategy seeking to profit from incremental moves in a stock and other financial instruments, such as options and futures.
A U.S. income tax form on which taxpayers report realized capital gains or losses. Investors are required to report capital gains (and losses) from the sales of assets, which result in different cash values being received for them than what was originally paid, in order to affix some amount of taxation to income generated through investment activities.
A type of investment defined by the Internal Revenue Code as a regulated futures contract, foreign currency contract, non-equity option, dealer equity option, or dealer securities futures contract. Each contract held by a taxpayer at the end of the tax year is treated as if it was sold for its fair market value, and gains or losses are treated as either short-term or long-term capital gains.
A bullish, directional strategy with unlimited risk in which a put option is sold for a credit, without another option (of a different strike or expiration) or instrument used as a hedge. The strategy assumes that the stock will stay above the strike sold; in which case, as time passes and/or volatility drops, the option can be bought back cheaper or expire worthless, resulting in a profit.
A bullish, directional strategy with substantial risk in which a put option is sold for a credit, without another option (of a different strike or expiration) or instrument used as a hedge. The strategy assumes that the stock price will stay above the strike sold; in which case, as time passes and/or volatility drops, the option can be bought back cheaper or expire worthless, resulting in a profit. This strategy entails a high risk of purchasing the underlying stock at the strike price when the market price of the stock will likely be lower.
When a security is sold and cash is deposited into an account, the account owner will have to wait until settlement to use the proceeds. Until then, those proceeds are considered unsettled cash. Settlement cycles can vary depending on the product.
The process of selling an asset (like stock or ETFs) with the hope of buying it back at a lower price (sell high, buy low). Short sellers are bearish and believe the price will decline. Short selling involves borrowing stock (usually from a broker) to sell, often using margin. If the price of the stock in question rises too much, the short seller will receive a margin call and be required to put up more money.
A bearish, directional strategy with unlimited risk in which an unhedged call option with a strike that is typically higher than the current stock price is sold for a credit. The strategy assumes that the stock will stay below the strike sold; in which case, as time passes and/or volatility drops, the call option can be bought back cheaper or expire worthless, resulting in a profit.
A defined-risk directional spread strategy composed of a short call option and a long further out-of-the-money call option. Short call verticals are bearish and sold for a credit at the onset of the trade. The risk of a short call vertical is typically limited to the difference between the short and long strikes, minus the credit.
A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer does not have a long stock or long call position. A short put position is uncovered if the writer is not short stock or long another put.
A bullish, directional strategy with limited risk in which a put option with a strike that is lower than the current underlying asset's price, is sold for a credit, without another option (of a different strike or expiration) or instrument used as a hedge. The strategy assumes that the stock will stay above the strike sold; in which case, as time passes and/or volatility drops, the option can be bought back cheaper or expire worthless, resulting in a profit.
A defined-risk directional spread strategy composed of an equal number of short (sold) and long (bought) puts in which the credit from the short strike is greater than the debit of the long strike, resulting in a net credit taken into the trader's account at the onset. Short put verticals are bullish. The risk in this strategy is typically limited to the difference between the strikes minus the received credit. The trade is profitable when it can be closed at a debit for less than the credit received. Breakeven is calculated by subtracting the credit received from the higher (short) put strike.
A bullish strategy in which a put option is sold for a credit, usually at a strike price below the current price. This may be done with a goal of the stock staying above the strike price and the option expiring worthless and the premium collected. Or, it may be done with a goal of being assigned the stock at the lower strike price. The risk is that the stock is assigned and then falls in value, making the total risk that of the strike price down to $0.
Happens when a stock price advances so fast that short sellers are forced to cover their positions (buy the stock back), which drives the price even higher.
To short is to sell stock that you don't own in order to collect a premium. The idea is that if you believe the price of the stock will decline, you can “borrow” the stock from your broker at a certain price and buy back (“cover”) to close the position at a lower price later. Your potential profit would be the difference between the higher price you shorted at and the lower price you covered.
A market-neutral strategy with unlimited risk, composed of an equal number of short calls and puts of the same strike price, resulting in a credit taken in at the onset of the trade. The strategy assumes the underlying will stay within a certain range, in which case, as time passes and/or volatility drops, the options can be bought back cheaper than the credit taken in, or expire worthless, resulting in a profit. Break-even points of the strategy at expiration are calculated by adding the total credit received to the call strike and subtracting the total credit received from the put strike.
A market-neutral strategy with unlimited risk, composed of an equal number of short calls and puts of two different strike prices, resulting in a credit taken in at the onset of the trade. The strategy assumes the underlying will stay within a certain range, in which case, as time passes and/or volatility drops, the options can be bought back cheaper than the credit taken in, or expire worthless; resulting in a profit. Breakeven points of either strategy at expiration is calculated by adding the total credit received to the call strike and subtracting the total credit received from the put strike.
A defined-risk directional spread strategy composed of an equal number of short (sold) and long (bought) calls or puts with the same expiration in which the credit from the short strike is greater than the debit of the long strike, resulting in a net credit taken into the trader’s account at the onset. Short call verticals are bearish, while short put verticals are bullish. The risk in this strategy is typically limited to the difference between the strikes minus the received credit. The trade is profitable when it can be closed at a debit for less than the credit received. Breakeven is calculated in a short put vertical by subtracting the credit received from the higher (short) put strike, or in the case of a short call vertical, adding the credit received to the lower (short) call strike.
To sell an asset, such as an option or stock, that you don’t own in order to collect a premium. The idea is that if you believe the price of the asset will decline, you can borrow the stock from your broker at a certain price and buy back (cover) to close the position at a lower price later. Your potential profit would be the difference between the higher price you shorted at and the lower price you covered.
To short is to sell an asset, such as an option or stock that you don’t own in order to collect a premium. The idea being that if you believe the price of the asset will decline, you can buy back (or “cover”) your short at a lower price later. Your potential profit would be the difference between the higher price you shorted at and the lower price you covered.
A simple moving average (SMA) is a technical indicator that’s calculated by adding the closing price of a stock or other security over a specific period of time and dividing the total by the appropriate number of trading days. For example, a 20-day SMA is the average closing price over the previous 20 days.
The Sizzle Index is a measure of the current options volume versus the past five trading days’ volume. It’s a ratio of the current volume of all the options for a stock and the average daily volume for all the options over the past five days. It indicates whether a stock’s options are more or less active than they have been. If the Sizzle Index is greater than 1.0, the current options volume is greater than the average of the past five days. If it’s less than 1.0, it is lower.
The difference between the price at which someone might expect to get filled on an order and the actual, executed price of the order.
Small-capitalization stocks are typically companies with market values (share price multiplied by number of shares outstanding) under $1 billion.
The price where a security, commodity, or currency can be purchased or sold for immediate delivery.
An option position or order that contains two or more option “legs,” which typically includes at least one short and one long position.
An options position or order that contains two or more options “legs,” typically including at least one short and one long leg.
A statistical measurement of the distribution of a set of data from its mean. For price charts, this is the historical volatility, or the average distance that the price of an asset moves away (deviates) from its mean.
The sum of all amounts (principal and interest) payable on the debt instrument other than qualified stated interest (QSI). If all stated interest on a debt instrument is QSI, then its SRPM is equal to its stated principal amount or par value.
The stochastic oscillator is a momentum indicator that was created in the late 1950s by George C. Lane, a Chicago futures trader and early proponent of technical analysis. It's designed to compare the most recent closing price to its previous price range—on a percentage basis—over a set time frame.
A type of order that turns into a market order to buy or sell a security once a specified “stop” price is reached. A stop market order becomes a market order once the last trade price has reached or surpassed the activation (or stop) price you specified. Buy-stop market orders require you to enter an activation price above the current ask price. The activation price for a sell-stop order must be placed below the current bid price.
Typically triggers the sale of a security once a specified “stop” price is reached. Buy-stop market orders require you to enter an activation price above the current ask price. Sellers must enter the activation price below the current bid price. A stop order does not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.
Typically trigger the sale of a security once a specified “stop” price is reached. Buy-stop market orders require you to enter an activation price above the current ask price. Sellers must enter the activation price below the current bid price. A stop order does not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.
A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same strike price, expiration, and underlying asset. When both options are owned, it’s a long straddle. When both options are written, it’s a short straddle.
A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same expiration and underlying asset but different strike prices. When both options are owned, it's a long strangle. When both options are written, it's a short strangle.
The strike (or exercise) price is the stated price per share for which the underlying asset may be purchased (in the case of a call) or sold (in the case of a put) by the option owner upon exercise of the options contract. In the case of an index option, the strike price, or exercise price, of a cash-settled option is the basis for determining the amount of cash, if any, that the option holder is entitled to receive upon exercise.
In technical analysis, support is a price level where downward movement may be restrained by accumulated demand at or around that price level.
A position that mimics the risk/reward profile of another position, typically using some combination of stock and options. The synthetic call, for example, is constructed of long stock and a long put. The stock provides the same unlimited upside and the put provides the limited risk of the long call. The synthetic put is constructed of short stock and long call. It simulates a long put position.
Examines historical trading data such as price and volume data to identify previous chart patterns with the hope of anticipating stock price movements. Some technical analysis tools include moving averages, oscillators, and trendlines.
A measure of an options contract’s sensitivity to time passing one calendar day. For example, if a long put has a theta of -0.02, the options contract’s premium will decrease by $2.
Time decay, also known as theta, is the ratio of the change in the price of an option to the decrease in time until expiration. As an option approaches its expiration date without being “in the money,” its time value erodes because of the reduced probability the option will be profitable.
Trailing P/E is based on the past 12 months’ per-share earnings; these financial results have already been reported by the company and are likely reflected in the stock price.
Treasury Inflation-Protected Securities (TIPS) are backed by the U.S. government and carry a par value that rises with inflation, as measured by the CPI. TIPS pay interest twice a year, at a fixed rate.
The Trefis price is the per share value estimate of the security based on their valuation of the company’s assets and liabilities.
Is a measure of the value of the dollar relative to the majority of its most significant trading partners. The index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona, and Swiss franc.
Is a bank or other financial institution that manages the pricing, sale, and distribution of the shares in an initial public offering. The underwriter works closely with the issuing company over a period of several months to determine the IPO price, date, and other factors. Underwriters receive fees from the company holding the IPO, along with a chunk of the shares.
A measure of an options contract’s sensitivity to a one percentage point change in implied volatility. For example, if a long option has a vega of 0.04, a one percentage point increase in implied volatility will increase the options premium by $4 per contract.
A vertical call spread is constructed by purchasing one call and simultaneously selling another call in the same month but at a different strike price. A long vertical call spread is considered to be a bullish trade. This means that the purchaser is expecting the stock to go up. Further, a long vertical call spread is considered a debit spread which simply means that the purchaser had to put out money to buy the spread. Now, if the stock proceeds up, the spread’s value will expand.
A vertical put spread is constructed by purchasing one put and simultaneously selling another put in the same month but at a different strike price. A long vertical put spread is considered to be a bearish trade. A short vertical put spread is considered to be a bullish trade.
An options position composed of either all calls or all puts, with long options and short options at two different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and the quantity of short options netting to zero.
An option position composed of either all calls or all puts, with long options and short options at two different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and the quantity of short options netting to zero.
An index that measures the implied volatility of the S&P 500 Index options. Otherwise known to the public as the “fear” index, it’s most often used to gauge the level of fear or complacency in a market over a specified period of time. Typically, as the VIX rises, options buying activity increases, and options premiums on the S&P 500 Index increase as well. As the VIX declines, options buying activity decreases. The assumption is that greater options activity means the market is buying up hedges in anticipation of a correction. However, the market can move higher or lower, despite a rising VIX.
Volatility (vol) is the amount of uncertainty or risk of changes in a security’s value. This concept is based on supply and demand for options. Higher demand for options (buying calls or puts) will lead to higher vol as the premium increases. Low demand or selling of options will result in lower vol. Vol in its basic form is how much the market anticipates the price may move or fluctuate.
The difference in implied volatility (IV) levels in strike prices below the at-the-money strike versus those above the at-the-money strike. For example, if a stock is trading at $50, and the 40-strike has an IV of 30, the 50-strike has an IV of 27, and the 60-strike has an IV of 25, we’d say the volatility is skewed to the downside.
Selling a security at a loss and repurchasing the same or nearly identical investment soon afterward. By rule, if you hold a position in a stock or option, for instance, then sell it for a loss but buy the same stock or an option on the same underlying stock within a 61-day window (30 days before or after the closing transaction), you can’t use the loss on your original sale.
Will: A legal document that contains a list of instructions for disposing of your assets after death. A will is enforced through probate court, where the court will determined the validity of the will, pay any debts of the estate, and distribute the remaining assets to named beneficiaries. Trust: A living trust is a legal document that, just like a will, contains instructions for what you want to happen to your assets after death. Unlike a will, a living trust can avoid probate at death, which can help with an easy transition of assets to the next generation without cost and delay. Most advisors feel a trust allows for better control of your assets, may add protections such as providing for underage and adult children, asset protection, and preventing the court from controlling your assets if you become incapacitated. Source: Mercer Advisors
Comprised of over 6,700 stocks, the Wilshire 5000 Total Market Index (ticker $W5000FLT) includes nearly all companies headquartered in the U.S. that have shares listed on the NYSE and other domestic exchanges. The Wilshire 5000, which is based on market cap, aims to track the overall performance of the U.S. market.
The yield curve reflects market expectations for interest rates, sometimes tipping the Federal Reserve’s hand and sometimes lagging the Fed’s monetary policy action. The curve’s shape is often tracked by stock, bond, and currency investors alike to measure the perception of rising or falling interest rates. Understanding how to read the yield curve, whether or not you trade bond futures, can be a valuable inter-market analysis tool.
The total anticipated return of a bond if it’s held until maturity, when the principal is returned to the investor. The yield-to-maturity formula considers all coupon payments, as well as the current discount from (or premium to) the bond’s par value.
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