Glossary C

The financial world is full of jargon - i.e. strange words no-one understands. Here we try to explain some of the many technical terms.

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C

CAC 40

An index of the 40 top stocks on the Paris Stock Exchange (- or 'Bourse'.)

Calendar Spread

An options trading strategy consisting of buying one and selling one option of the same type with the same strike price, but which expire in different months.

Call

An option that gives the holder the right to buy the underlying stock at a specific price for a specific period of time. Calls can be bought or sold. You pay an amount, the premium, to buy a call, and receive the premium if you sell a call.

If you buy a call you are betting on a rise in the underlying share price, and if you sell ('write') one you are betting it will not rise.

Selling calls is often done by people who already own the underlying stock as a way to generate a return on a mostly static share price; if you decide the price will remain roughly constant you can write a call for a strike price which you do not believe will be achieved, the option will then expire worthless, while you have pocketed the premium, i.e. the price you got paid for selling the option - you will have made money on a 'do nothing' stock.

Capital in Excess of Stock

A US accounting convention - any additional cash that a company gets from issuing stock in excess of par value under certain financial conventions.

We have no idea what it actually means.

Capitalism

Whatever the Rich happen to be doing.

Carlyle Group

An investment vehicle for the world's pre-eminent group of crony capitalists, all ex-high political office holders, e.g. ex-Presidents, Prime Ministers, cabinet officials. Totally connected, and with their fingers in everything. Somewhat disliked within even the conventional financial world, as 'it is this kind-of-thing which gives capitalism a bad name', i.e. an insular group of mates doing favours for each other, looking suspiciously like the 'sort of thing' which goes on in less sophisticated economies, or went on in days of yore - funny handshakes, old school ties.

Recently bought the entire UK defence research business - something of a sweetheart deal, with little or no competitors allowed. More worryingly, has also assumed control of the nuclear weapons industry in the USA.

Cartel

When several companies who dominate a market form an agreement between themselves to maintain price levels. Usually highly illegal; most countries will have bodies which attempt to ensure that there is competition within a market.

Cash Ratio

The amount of cash that a company has divided by its current liabilities.

Causal Boundary

Things which are apparently 'close', need not actually be related; consider as an example that within a single country you may find two distinct regional groups; historically, the people will have been separated by a desert or mountain range, and so have not interacted with each other much, becoming over time quite different in their customs. It is worth considering this analogy in connection with share prices; by inspection you may see time periods where the share price behaves 'differently' - all the time it is shaking up and down, but there seems to be some 'quality of behaviour' in one region, not shared in the other. If you can find some extreme news events around the apparent boundary then you can with some confidence conclude that there has been a change in behaviour, but this is not always the case; even so, it may be correct and indeed useful to regard the price within the first region as having no influence on the later.

The importance of this idea of changing underlying behaviour relates to the relevance of the input data when using our statistical learning algorithms; with these algorithms we are trying to discover the underlying 'law' which is generating the share price - if this law itself changes over the time period of our observations, our fancy techniques are not likely to do us much good. The practical advice here is thus to be wary of just 'chucking everything in' when doing your analysis.

Central Bankers

Groups of men who spend their time trying to control the uncontrollable, i.e. prevent market crashes, avoid inflation and deflation, support equity values, preserve the value of their currency, using only very crude economic levers such as interest rates. Market watchers will analyze the every utterance of central bankers and other money men looking for hidden meanings; a particular sport in the UK seems to be guessing whether or not, or if so, then exactly when, Britain will join the Euro by deciphering the facial tics of Gordon Brown; in the US it is believed interest rate cuts may be divined by examining the during-speech coughs of Alan Greenspan.

Certificates

Legal title to a shareholding is denoted by a paper share certificate. These days brokers offer a nominee service, which means they hold all the shares together in a big pile. In truth, no one really cares about paper certificates anymore - trading on the markets is about cash.

Chaos

A common 'hype-word' often bandied about when discussing the markets; the basic observation is that apparent randomness can arise from classical systems - which was a shock to many people.

If you are interested, the book of the same name by James Gleick is quite a good read - it is particularly interesting when describing the clash of ideas between the classical economists and the theoretical physicists at the Santa Fe Institute when trying to develop models of the financial markets. Without wishing to spoil the book, one side got an intellectual hiding from the other. Guess which?

Charity

A business that does not pay tax.

Steady on! You go too far - this is an outrageous slur on the many dedicated men and women who strive to help the unfortunate poor and dispossessed ... how dare you, you cheap money-grubber, slander with your cynicism ... etc etc blah blah

Just hear me out - I'm not slagging off Oxfam or Medecin Sans Frontieres or Amnesty or any of the obviously fine and honourable organisations out there, I just want to point out some unusual facts regarding the charity business.

There are lots of charities out there - over 50000 in the UK alone.
The Charity Commission polices these organisations to make sure they are what they say they are, and that the money that is collected goes to the right people; the commission have about 200 agents to do this. Given the numbers involved it either means these agents work incredibly hard, or that very little checking is actually done. Whatever checks are done are likely to be more reactive, than pro-active - so, if you were dodgy, chances are you could hightail it to, say, Northern Cyprus, with all the money before they got anywhere near you.
Rules about how quickly the collected monies should be distributed, and what level of deductions for expenses is allowed, are a bit vague.
Charities don't pay tax - let's say it again. This is a massive incentive to the criminal operator. There is also the opportunity for money laundering from other illegal activities, even if the charity is run legitimately.
You would be surprised what can qualify as a charity - e.g. private schools who charge their pupils £15K per year.

The point is, the system is open to abuse, and abused it is.

Religions are similarly tax-efficient enterprises, but the qualifying criteria are a bit higher - burning some incense, walking around in a dressing gown and getting your friends to address you as 'Lord High Metacron - Spirit of the Aether' - will not work. At least it didn't for me.

Chartist

Someone who believes that all you need to know about a stock is already there, embedded within the time history of the share price data. This is a very strong assumption, even if you think it is almost totally correct. (When is 'almost', enough?!) Chartism comes with it a great deal of silly folklore, i.e. the belief that certain patterns in the stock market are buy, or sell, signals. These patterns often have very interesting names like the Double Top, Head and Shoulders, or the Descending Flatulent Heron.

Be wary of anyone who tries to convince of the worth of this kind of 'analysis'.

China

The worlds most populous nation and hence its largest collection of potential consumers and workers. Nominally communist in political terms, it has embraced - to a limited extent - the market system in recent decades. What China eventually decides to do with its economy is of great interest to everyone in the world. Professional Asia-watchers staffing prestigious Washington think-tanks love to write long interpretations about Chinas long term objectives - but no one really knows what China will do. Since it has been relatively untouched by Western capitalism so far, it thus represents a place with enormous potential for growth; growth of course meaning, profit.

Historically, China has a long-held and arguably well-justified distrust of the West - this goes back to the Opium Wars, the Boxer Rebellion, Chiang Kai-Shek, the Korean War, Taiwan and the Cold War itself. Chinas leaders are very old and what may seem like ancient history to us, is only yesterday to them - they have long memories.

In capitalist terms, a sleeping giant. Sleepers will, of course, awaken.

Chirp

A chirp signal is one which has a change in frequency over time; classical signal processing has difficulty dealing with chirp signals as it is based upon oscillating waves of fixed frequency.

What has this to do with the stock market?!

If you look at share prices, you won't see much evidence for wave-like phenomena (- the domain of classical signal processing), but you probably will see many growing and decaying chirp signals superposed on one another; this tells us what kind of techniques we should be using to filter the signals; for example, wavelets, rather than Fourier transforms.

Cinema

In the film Trading Places, Dan Aykroyd and Eddie Murphy give an entertaining and fanciful account of short-selling and insider dealing (- by virtue of a stolen crop report) on the commodities markets as part of a revenge plot against the blue-blood WASPs who set out to ruin their lives. Jamie Lee Curtis also appears briefly, spectacularly.

In Wall Street, the Michael Douglas character, Gordon Gekko, is loosely based on the infamous 'junk bond king', Ivan Boesky. The main tool Gekko uses in his escapades is the old favourite, insider information. Also shown are hostile takeovers and the rich lifestyles of corporate raiders.

Ewan McGregor recently appeared in a mediocre movie about 'rogue trader' Nick Leeson. The culprits in this flick were derivatives, slack back office practices which allowed Leeson to cover up heavy trading losses, plus a coterie of blue-blood old duffers who ran the bank, yet understood little about what actually took place in it.

Benecio del Toro plays the futures markets in a recent picture.

Whatever you do, just don't confuse Hollywood for reality.

Classical Economics

Also known as General Equilibrium Theory (GET).

It is, basically - cutting through the bullshit - a load of old cobblers, but usually expressed with such bombastic, mathematical sophistry that many (- too many) take it seriously.

Classic Mistakes

Many and varied; lets just look at a few -

Using Tipsters - why would anyone not a friend or relative and who is not being paid to do so, offer you advice? Please adopt some cynicism here - altruism does not exist in the financial world, get used to it; the same goes for Web sites and bulletin boards.
Emotion. Simply stops rational thought. Emotional people cannot think straight - their decision-making apparatus goes all to hell.
Indiscipline. The adrenaline rush of trading produces a wave of euphoria; you feel more aggressive and start to take more risks, riding your intuition rather than doing any rational analysis. Despite having made a plan, you have decided to ignore it. More fool you.
Chasing Losses. You have made a loss; to recoup the loss you decide to make another, heavier, trade; you lose again, the cycle continues. In a short time you are in way over your head.
Getting Greedy - trying to time the exact tops and bottoms of the markets. Leave something for the next guy.
Trading Too Much. In the very short term, share prices are mostly noise.

Closing Trades

The whole point of making a trade is to open it, wait for a while, then close it having made a profit. We make this notion explicit by having an expiry time for every trade. For CFDs and spreadbets this is merely notional - you can keep a trade open as long as you like. We keep the notion of an expiry time for all trades as we wish to remind the user that the whole point of trading is to *realise* a profit at some point. For options, the expiry time is real - the option becomes worthless after that time.

You may want to close a trade before the expiry time you initially set - the reasons for this are fairly obvious; the trade alarms have two circuit-breaker position levels - profit target and stop loss - these tell you when a trade has went for, or against, you and you should close it out - i.e. to either 'take the money and run' before there is a correction, or take your loss 'on the chin', before you start to take a real hammering.

Closing option trades, especially those weird and wonderfully-named exotic combinations early is complicated by the existence of the options time value. When using combination trades, this time value can work for you, or against you - this is because the payoff profiles, which you should now be familiar with, are 'smoothed' when there is a lot of time left on the option; so, even for a combination trade which is strongly 'on-track' from the viewpoint of the alarm regions, you may have to hold onto it till very close to expiry to make your profit.

Do NOT be worried by these matters - the solution is simple and is always applicable when trading : check your position regularly, and be aware of your overall goals with respect to profit and loss.

Cockroach Theory and News Events

"If you find one cockroach, chances are there are plenty more ..."

"No news is good news ..."

There is a tendency in news reporting to focus on negative stories as they are the most dramatic and exciting for the end reader - this applies equally to the most sober-minded financial expert as it does to the tabloid-reading general public - we all love a bit of scandal. Because of this, companies which always seem to be in the news are somewhat worrying; what is more, bad news is very 'bursty' i.e. it arrives like the public buses, either not at all, or all together in a rush.

Bearing this in mind we can see how it is that the professional market-watchers tend to be very jumpy with regard to news events - there is some strong historical justification for it after all. However, continual over-reaction on the slightest whiff of some news precedent is unlikely to make for very successful trading, and being able to assess the importance of news events as they happen is a talent very few people have; in times of confusion there is thus the tendency to opt for the consensus viewpoint, which can lead not to safety, but to unstable herd behaviour.

Common Stock Equity

The difference between assets and liabilities, i.e. the net worth of the company.

Company Reporting

A game of hide-and-seek played by investors and accountants.

Accountants use every leverage and loophole to present company data in the most positive light, while investors attempt to read between the lines to infer what the real facts are. Likely to be reformed dramatically in the light of recent scandals.

Complexity

A relatively new scientific discipline which attempts to understand how the 'complexity' of real-world phenomena, like say stock markets, arises from underlying systems which are relatively simple. This viewpoint is exactly opposite from the tradition of scientific reductionism (- look at the world, then try to deduce the underlying laws) where we break a system apart into its components without looking at the overall systemic aspects; here we more or less assume underlying laws which seem reasonable (- e.g. the actions of traders in a market reacting to news), then see if we can reproduce realistic phenomena from these.

A number of measures of complexity have been proposed to help in this study, a fundamental exemplar of which is the Algorithmic/Kolmogorov Complexity; this is a precise definition of randomness for an individual object; it is the length in bits of the shortest program which can generate the object as its output. (A closely related concept is the Shannon Entropy of information theory). The interesting application of this complexity measure to stock market prediction (- a sequence of numbers is just a sequence of bits after all) is this - if we can deduce that the stock price behaviour is not totally random, that is, for the moment at least has some predictable component, then we can (- with appropriate techniques) use this to improve our probabilistic predictions, and subsequently use this to make a profitable trade. Remember, trading is a competitive game and all we need is a small advantage to make a profit.

This result merely reflects the folk wisdom of the savvy trader; that there are periods when one can trade profitably by 'getting in and getting out' - this is in sharp contrast to the hopeless optimism of the buy-and-holder, and the manic over-trading of the daytrader.

Condor

Selling or buying of 2 options with consecutive exercise prices, together with the sale or purchase of 1 option with an immediately lower exercise price and 1 option with an immediately higher exercise price.

Yes, options strategies do have some silly names.

Conflict of Interest

An example; being expected to give impartial advice, while receiving a commission for selling certain products. That kind of thing. Often results from having to 'serve two masters' metaphorically speaking.

Cons

See Scams.

Consideration

The total bill paid when buying shares i.e. amount plus commission and stamp duty.

Contango

A term relating to the futures markets - the opposite of backwardation.

Contrarian Strategy

An investing strategy that goes against the mood of the market.

Correlation

How a change in one quantity varies with a change in another. A high correlation shows there exists 'some relation' between two things, but not necessarily a direct, causal link. An example -

In Mexico, it was found owners of televisions lived longer than non-owners; but simply owning a TV set does not bestow better health - how could it? The most likely explanation of the data was that TV ownership implied greater wealth and greater wealth meant that the TV owners could also afford good food and visits to the doctor when they needed it; data explained. Note how the direct inference - that TVs somehow emit some sort of life-enhancing radiation - is clearly ridiculous.

Explanations of such correlations are often very difficult or even impossible to construct, but nevertheless, a correlation, once found, provides knowledge that can subsequently be exploited - you may not know the 'why' of it all, but you can still use the information. Looking for such correlations in financial data is the domain of the data-miner; the results of such researches are often used by marketeers in targeting their campaigns - the torrent of junk mail the average person receives will typically have been directed by a computer program which found that you matched some 'profile' thus making you the target for some product.

With regard to the time history of the share price, we can look for 'time correlations' within the data - these are more simply referred to as patterns elsewhere. The existence of time correlations within share price data is a controversial subject (- if there are significant levels of correlation within share price timeseries it implies the market is not 'efficient' which means that most of conventional economic theory is simply a lot of hoo-hah); the main viewpoints are that -

There are no time correlations in share price data; the share price is a stochastic, i.e. random process; markets are efficient and cannot be predicted - this is rather blinkered and dogmatic.
Time correlations exist, but only over very short timescales; in theory one could take advantage of this to make a profit, but that the trading costs incurred would wipe out it out - although more open-minded, this is still quite pessimistic.
There are time correlations in share price data existing over much longer timescales; some proponents of this viewpoint admittedly belong to the lunatic fringe, but we should not totally discount the possibility.

Our viewpoint is that all are possible; thus we would encourage the user to look at the share price over differing timescales, both in length and in terms of resolution; if you never look, you will never find anything - but don't expect to find something every time. (Note that in StockWave it is the advanced analyzers which attempt to use correlation information in the timeseries - access these from the analysis menu in the StockChart.)

The issue of correlations can be looked at from the other direction as well - if you are saying they do not exist, then you are saying that each price movement is totally independent of those which have preceded it, i.e. share prices have no memory about what has happened. Do you really think this is always the case? It is a very strong statement.

Corroboration

Evidence which backs up other evidence.

Only worthwhile if it is independent, i.e. you study a problem in two different ways with two different methods, but you reach the same answer. The chances are that the answer is correct as it would take a very unlucky fluke to get the exact wrong answer twice in a row. The more corroboration the better. Most legal systems around the world which are of any worth consider only corroborated evidence. For this reason StockWave gives the user a number of different analysis methods.

Corruption

A common sport in the financial world. In modern western markets it is usually done so subtly and in such sophisticated ways that people are often genuinely surprised when blatant, outright corruption is outed, e.g. false accounting, or insider trading. The most sophisticated players like to operate within grey areas where it is almost impossible to prove anything - complexity is the main technique used here; by creating complicated financial networks you can effectively muddy the waters to such an extent that no one - apart from yourself - really knows what is going on. Even if you do get collared, the chances are that the Serious Fraud Office will bungle the case, and even if they don't - why not pay back half what you stole and get 18 months R-and-R in Ford Open Prison; take the chance to have a nice rest from your high pressure lifestyle (- larceny is so stressful), and make some good business contacts with all the Old Etonians already in there.

Corruption and Fraud, indicators of

Fraud is always 'obvious' in retrospect, identifying it while it is happening is a lot tougher. Some suspicious aspects might be -

A management loaded with stock options; stock options can produce such massively inflated rewards that the temptation to loot the company is just too strong; just do whatever you need to do to rocket the share price in the short term, even if you end up destroying the company.
An unbelievable level of structural complexity; tell me Mr CEO, why does a mid-level office supplies company need 250 offshore shell companies?
Close relationships with politicians. Kickbacks, did you say? Anyone for Pork?
Excessive dynamism; if the upper management are always buzzing around like they are 'coked-off their tits', then they just may well be so.
A fondness for derivatives trading. 'Low risk, high return' - 'nuff said.
The whiff of brimstone. If it smells bad, it is bad ...
'We Worship Satan' - as the company motto. Do you think they are trying to tell us something?

Costs

Trading costs money; that's how the brokers stay in business.

Something to be minimized for the small investor; in the UK charges vary, but there is stamp duty, capital gains tax and brokers fees. Ideally we would like to see -

No stamp duty
No capital gains tax
Low commission
Low margin requirements
Easy short-selling
Guaranteed and instant execution with a non-repudiation agreement.
Small stake sizes
Stop losses
Conditional orders - e.g. OCOs

Coupling, Resonance and Stability

Things affect other things ...

If you wanted to create a detailed model of the markets you would quickly become bewildered by the variety of interaction pathways - it is all very complicated. Consider for the moment a simple system consisting of only three elements - the stock market, the property market and consumer spending - lets think about how these interact with each other -

The stock market represents the collective invested worth of the country; when it is doing well, people will pile in with their cash, drawing money away from elsewhere; when it is doing badly, they will try other areas, like for example, the property market. Falling stock markets mean less taxes for the government and reduced values for pension funds.
Everyone needs to live somewhere, so exposure to property is very common for most people, especially when prices are rising, when they will see it as an investment as well. Rising property values lead to paper gains - to benefit from these, people will take on debt, borrowing money against the increased value of their property.
Most people when given more cash will simply spend it; high levels of consumer spending keep the tills ringing and company profits high - this protects share price valuations, giving an upward force on the market.

Changes in one area will affect the others; there is a constant flow of money between each - but there has to be a balance. Usually, there should be a well defined phase relationship between these areas which will ensure an overall stability, i.e. as long as the interactions are "under control" then no crashes will occur in any of the areas.

These "big issues" are what concern Central Bankers - the big-time money men. The trouble comes about when the phase relation is wrong - then you will find that each subsystem will drive the others in exactly the wrong way you would wish; the feedback effects then create a destructive self-reinforcing cycle - in no time the whole thing will shake itself apart. This kind of phenomena is called a resonance effect. Central Bankers try to ward off the possibility of such disasters in the economy by the setting of interest rates - their only real instrument, plus the creating of new laws.

Of course, this model has only three elements - it is a simple toy - other elements could provide stability, but maybe not; if you find this kind of thing fascinating, add some more variables to the model, e.g. exchange rates, oil prices, unemployment levels, war, global warming, population increase/decrease, religious fundamentalism, political extremism; if you still find it fascinating and your brain is not ready to explode, you may want to become a professional economist - you can then think of such things all day! Or better still, and even more fun - get yourself one of the so-called God games, like SimCity, and find out how hard it is to build a thriving society without plunging it into disaster.

One general point to remember when building your models is that more variables can simply add greater uncertainty, leading to a lack of predictability.

Covered Call

A call option written by a person who owns the underlying security.

If you do not own the stock you are writing a naked call. Covered call writing is seen as a safer thing to do than naked call writing as if things go bad, you simply sell the stock you already own. A Covered Put is a similar idea.

Covered Warrants

Options with long expiry dates; a new product to be offered by the LSE. Very popular in France and Germany.

Crashes

Sudden drops in the market, usually triggered by some exceptional event. Examples would be - Wall Street 1929, Black Wednesday, the collapse of LTCM. Recent mini-crashes occurred after the September US terrorist attacks, and the accountancy scandals. Crashes are the main reason why small investors are wary of directly trading in the markets themselves; their fears have in the past been justified - if something extreme happens it is very often the small investor who cannot get out in time - the big players, having access to better, more timely, information can usually moderate their losses.

Crazy Ideas

Ever since the dawn of time people have wanted to predict the future; being able to predict the stock market would make a person very rich indeed. As a result, every possible oracular technique has been applied to the problem of stock market prediction - even including things like - the I Ching, Tarot Cards, Runes, Astrology, and so on.

These are obviously a bit crazy, aren't they? But consider this - the majority of the commonly used 'trading systems' are little better than these laughable superstitions - they have no scientific foundation either. Furthermore, suppose someone told you of something you had never heard of before, which sounded very impressive, like 'cross-correlated detrended kalman anti-filtering' (- there is no such thing; its just a hodge-podge of technical terms) which was a 'sure-fire' method that was 'scientifically-proven' (- by whom?) to give 'unbelievable returns', and all for $499.95 (plus tax)?

Not so easy now, is it?

CREST

A settlement system that allows the holding of share certificates in electronic form. It is part of the LSE electronic trading infrastructure - at the end of a days trading, all the accounts have to be settled; in the old days this meant a mountain of paperwork - today we have mountains of computers.

Current Ratio

Total current assets divided by total current liabilities - a measure of liquidity, i.e. the ability to pay short-term obligations. Useful to compare companies within the same industry. The higher the ratio, the more liquid the company.

Curve Fitting/Regression

Taking a collection of data points and attempting to find the underlying relationship (assuming there is one) by plotting a curve through them. Many choices, obviously about what kinds of curve to use, the simplest being a straight line. Usually a more sophisticated set of curves is used, and the 'best-fit' is found using these. The whole point of doing the fit is that if you have somehow found the right one, extrapolating the curve will give you a reasonably accurate prediction.

Cynic, Cynicism

Someone who sees the world as it is, rather than as others would wish him to see it - [Ambrose Bierce]

A cynic interprets the actions of others in terms of underlying selfish motives; cynics are thus generally disliked because they 'see the bad in others' and appear to lack trust - now, how you behave in your personal life is up to you, but bear in mind this simple fact when considering the financial world; everyone involved in it, is in the simple pursuit of money, and usually large amounts of it; consider still further that the markets are meant to work based on the idea that everyone will act in their own monetary self-interest and you should begin to see that the financial world is about as 'cynical' as anything can possibly be. Bear this in mind the next time you see an advert for some 'High Return/No Risk' investment product.

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