ExpertGlossary

A markdown is the amount a broker-dealer earns on the sale of a fixed-income security and is the difference between the sales price and what the seller realizes on the sale.

The markdown may or may not appear in the commission column or be stated separately on a confirmation statement.

A markdown is determined, in part, by the demand for the security in the marketplace. A broker-dealer may charge a smaller markdown if the security can be resold at a favorable markup.

The term markdown also refers more generally to a reduced price on assets that a seller wants to unload and will sell at less than the original offering price.

Traditionally, a securities market was a place - such as the New York Stock Exchange (NYSE) - where members met to buy and sell securities.

But in the age of electronic trading, the term market is used to describe the organized activity of buying and selling securities, even if those transactions do not occur at a specific location.

Market capitalization is a measure of the value of a company, calculated by multiplying the number of either the outstanding shares or the floating shares by the current price per share.

For example, a company with 100 million shares of floating stock that has a current market value of $25 a share would have a market capitalization of $2.5 billion.

Outstanding shares include all the stock held by shareholders, while floating shares are those outstanding shares that actually are available to trade.

Market capitalization, or cap, is one of the criteria investors use to choose a varied portfolio of stocks, which are often categorized as small-, mid-, and large-cap. Generally, large-cap stocks are considered the least volatile, and small caps the most volatile.

The term market capitalization is sometimes used interchangeably with market value, in explaining, for example, how a particular index is weighted or where a company stands in relation to other companies.

Market cycles are the recurrent patterns of expansion and contraction that characterize the securities and real estate markets.

While the pace of these recurrent cycles of gain and loss isn't predictable, certain economic conditions affect the markets in fairly reliable ways.

For instance, stock and real estate usually gain value when the economy is healthy and growing, whereas bonds often do well during periods of rising interest rates. And during times of economic uncertainty, investors often prefer to put their money into short-term cash equivalent investments, such as US Treasury bills.

The cyclical pattern in one type of asset sometimes works in opposition to what's occurring at the same time in another asset class or subclass. For example, when the stock market is gaining value, the bond market may be flat or falling, or vice versa. Similarly, sometimes large-company stocks increase in value faster than small caps, but sometimes the opposite is true.

But while the ups and downs of the markets are inevitable, it's also true that it's virtually impossible to pinpoint the peak of a rising market or the bottom of a falling market except in hindsight.

A broker-dealer who is prepared to buy or sell a specific security - such as a bond or at least one round lot of a stock - at a publicly quoted price, is called a market maker in that security.

Other brokers buy or sell specific securities through market makers, who may maintain inventories of those securities.

There is often more than one market maker in a particular security, and they bid against each other, helping to keep the marketplace liquid.

The Stock Market and the corporate and municipal bond markets are market maker markets. In contrast, on the floor of the New York Stock Exchange (NYSE) there's a single specialist to handle transactions in each security.

When you tell your broker to buy or sell a security at the market, or current market price, you are giving a market order. The broker initiates the trade immediately.

The amount you pay or receive is determined by the number of shares and the current bid or ask price. Market orders, which account for the majority of trades, differ from limit orders to buy or sell, in which a price is specified.

A security's market price is the price at which it is currently trading in an organized market.

A good indication of the market price of a stock selling on the New York Stock Exchange (NYSE) or the NASDAQ Stock Market is the last reported transaction price.

However, if you give a market order to buy securities, then market price means the current ask, or offer. If you give a market order to sell, market price means the current bid.

Market risk, also known as systematic risk, is risk that results from the characteristic behavior of an entire market or asset class.

One example of this type of risk is that the market prices of existing bonds generally fall as interest rates rise because investors are not willing to pay par value to own a bond that pays less interest than other bonds available in the marketplace.

So if you wanted to sell your existing bonds, you would probably have to settle for less than you paid to buy them.

Asset allocation is generally considered the antidote for market risk, since if your portfolio includes multiple asset classes it tends to be less vulnerable to a downturn in any one class.

Market timing means trying to anticipate the point at which a market has hit, or is about to hit, a high or low turning point, based on historical patterns, technical analysis, or other factors.

Market timers try to buy as the market turns up and sell before the market turns down. It's the anticipated change in direction rather than the amount of time that passes between those changes that's significant for these investors.

The term is sometimes used in a negative sense to refer to a trading strategy that aims for quick profits by taking advantage of short-term changes in securities' prices.

Market timers, sometimes known as day traders, trade electronically. They try to buy low and sell high by taking advantage of second-to-second or minute-to-minute changes in the financial marketplace. They base decisions on information such as a forecast on interest rates or a sell-off in a particular market sector.