General

Measure the Trade-Off Between Risk and Return with the CAPM

The Capital Asset Pricing Model (CAPM) is used to determine the appropriate rate of return of an asset. In calculating this expected return, the CAPM accounts for both risk and the time value of money and can be used to assign a discount rate for the purpose of asset valuation. The idea behind [...]

What is an American Depositary Receipt (ADR)?

An American Depositary Receipt of “ADR” is a certificate that represents one or more shares (or a fraction of a share) in a foreign stock. Usually, when stocks of foreign companies trade in the U.S. markets, they are traded as American Depositary Receipts. ADRs trade in U.S. dollars with the underlying security held [...]

What is a “Pump and Dump” Scheme?

A pump and dump scheme is a form of stock fraud in which the perpetrators seek to artificially inflate the price of a stock in which they already have a position in order to profit. Typically, the stocks used in a pump and dump scheme are microcap or penny stock companies as the prices [...]

The Impact of the Ex-Dividend Date on Stock Trading

Ex-dividend (abbreviated as xd or ex-div) is a share classification to signify that a declared dividend will go to the seller rather than the buyer. The ex-dividend date represents the first date that the buyer is not entitled to a declared dividend. Before this date, the stock is traded under the classification of [...]

Liquidity Risk in Stock Investing

Liquidity risk is the risk that a given security cannot be sold in a timely manner to avoid a significant loss or make a desired profit. For these reasons, liquidity risk represents financial risk. Securities that are lightly traded are often referred to as “illiquid” and will generally have higher bid-ask spreads than securities [...]

The Bid, Ask, and Spread in Stock Investing

Unlike most other markets, the stock market has the unique aspect of having both the buyer and seller set prices. The bid price is the price the buyer states they will pay for the stock while the ask price is the price the seller is asking for the stock. The role of the [...]

The Stock Market: An Auction Market

An auction market is a market in which buyers submit competitive bids while sellers simultaneously submit competitive offers. The stock market is an auction market as it leverages this process to enable swift trading with the stock price representing the highest price a buyer will pay and the lowest price a seller will sell. [...]

Total Return Index and Stock Investing

The total return index is an equity index that serves as a tool to measure the overall performance of a group of stocks over some period of time. A total return index works under the assumption that all cash distributions (such as dividends) that are associated with the stocks in the index are reinvested [...]

What Does a Market Maker Do?

A market maker is a broker-dealer company (typically a bank or brokerage firm) whose role is to “make the market” for a particular stock. The market maker accepts the risk associated with holding shares in inventory in order to facilitate the trading of that security; selling shares to investors looking to purchase or buying [...]

The Definition of Market Value Added (MVA)

Market Value Added (MVA) is a calculation that measures the difference between the current market value of a company and the capital contributed to the company by its investors. The market value added is the current market value of company debt and equity, less the total of all capital claims held against the company. [...]