Glossary F

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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F

Facts

Things which are true; to be distinguished from rumour, hype, opinion, bluster and baloney.

A 'fact' is also the commonly used term for a neural network training datum.

Fair Price

Anyone's guess.

Famous Quotations

Let us Pillage the Past for the Wisdom of Great Men ... !

Lots of great men and women have said some -very- interesting things about money and finance; here is a small selection - some of it may surprise you ...

[on the use of information, observation and analysis]

"Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth."

Sherlock Holmes (by Sir Arthur Conan Doyle)

"Once is happenstance. Twice is coincidence. Three times is enemy action."

Auric Goldfinger, in "Goldfinger" by Ian L. Fleming

Keep these two quotes in mind when doing your company research - dig deep, and then dig even deeper.

"The secret of success is to know something nobody else knows."

Aristotle Onassis

- the whole reason for StockWave!

"The power of accurate observation is commonly called cynicism by those who have not got it."

George Bernard Shaw

"Cynicism is an unpleasant way of saying the truth."

Lillian Hellman

"A lie told often enough becomes the truth."

Lenin

Bear this in mind when pondering the prognostications of the many and varied stock market pundits and analysis experts; consider that of every major financial scandal of the past few years, none whatsoever have been flagged-up by the mainstream experts, ratings agencies or investment analysts before they actually happened. The real purpose of the stock market experts is simply to act as cheerleaders to the general public.

[from JK Galbraith]

"Economics is extremely useful as a form of employment for economists."

"The only function of economic forecasting is to make astrology look respectable."

"The conventional view serves to protect us from the painful job of thinking."

- JK was of course an economist himself (- as well as being the grandfather of the popular female writer of boy-wizard adventures.)

"An economist is a man who states the obvious in terms of the incomprehensible."

Alfred A Knopf

"Not everything that can be counted counts, and not everything that counts can be counted."

Albert Einstein

[from Adam Smith]

"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable."

"A person who can acquire no property, can have no other interest but to eat as much, and to labour as little as possible. Whatever work he does beyond what is sufficient to purchase his own maintenance can be squeezed out of him by violence only, and not by any interest of his own."

"All for ourselves and nothing for other people seems, in every age of the world, to have been the vile maxim of the masters of mankind."

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance, to raise prices."

"There is no art which one government soon learns of another than that of draining money from the pockets of the people."

- not quite what you would reckon to hear from the intellectual pin-up of free market capitalism; Smith held the Chair of Moral Philosophy at Glasgow, his other major work is the Theory of Moral Sentiments.

"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

J M Keynes

[on Plutocrats]

"The rich are the scum of the earth in every country."

G K Chesterton, Flying Inn (1914)

"Of all forms of tyranny the least attractive and the most vulgar is the tyranny of mere wealth, the tyranny of plutocracy."

Theodore Roosevelt

"Every normal man must be tempted at times to spit upon his hands, hoist the black flag, and begin slitting throats."

H L Mencken

"Behind every great fortune there is a crime."

Honore de Balzac

[on Central Bankers and Debt]

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Thomas Jefferson

- this quote is probably why the US Central Bank is not called as such, but rather 'The Federal Reserve'; being so-called because it is not Federal, being privately-owned, and has no reserves. (With apologies to Voltaire's remarks on the Holy Roman Empire.)

"We must not let our rulers load us with perpetual debt."

Thomas Jefferson

[on Democracy]

"Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time."

Winston Churchill

"Only two things are infinite, the universe and human stupidity, and I'm not sure about the former."

Albert Einstein

[on Taxes]

"The hardest thing in the world to understand is the income tax."

Albert Einstein

"The avoidance of taxes is the only intellectual pursuit that carries any reward."

J M Keynes

"When there is an income tax, the just man will pay more and the unjust less on the same amount of income."

Plato

"Good people do not need laws to tell them to act responsibly, while bad people will find a way around the laws."

Plato

Fat Fingers

An incident which occurred on the London market; apparently a trader at a large institution pressed the wrong button on his trading station, mistakenly. This mistake caused a very large number of shares to be sold which resulted in a large, very unexpected movement of the entire FTSE index. This kind of large movement of the index we would normally attribute as a reaction to some external, totally unexpected news event - but this was not the case here. Instead the internal dynamics of the market produced the fluctuation.

The question remains whether this was truly an accident; the story released to the press at the time was that the trader had lost many millions of pounds for his bank as a result, and it was all a dreadful mistake, but there is a lingering suspicion that some kind of market manipulation may have been involved.

Fat Tails

When dealing with random processes our principal tool is the histogram - this is a plot of the number of occurrences of an event; with share prices these 'events' would be price moves of a certain size. Visually, the histogram will usually be lumped around a central value with a tailing-off to either side; how spread-out the histogram is, is called the volatility.

We use the histogram in dealing with discrete events, but as the number of events increases we gradually begin to approximate continuous processes; the histogram then becomes the probability distribution of the process. In statistics we often assume known functional forms for a probability distribution to allow us to do our calculations, i.e. we assume some form which we can integrate exactly, and thus produce a neat solution - a formula. This kind of, apparently, harmless assumption can lead us into harm though; the kinds of functional forms which we assume for our processes will have tails which die-off quickly - actual share prices have tails which do not, i.e. 'fat' tails. A fat-tailed distribution tells us that apparently 'extreme' events are much more likely than we would like to think; these tails usually originate from extreme news events - we have termed these trend-breaker events elsewhere - these are events which do not happen often enough for us to model properly, but which do happen, and have big consequences when they do; a good example would be the sudden resignation of the CEO of a company - this may happen a handful of times in a 30 year period, but when it does occur is likely to cause a step-jump in the share price. The consequences of such for risk modelling are obvious, in particular with regard to options with long expiry dates.

Feedback

As a small investor, you may trade stocks or their equivalent in blocks of 1000; this is minute compared with the volumes of shares traded daily - your influence on the market will thus be infinitesimal. But suppose you were trading many millions of shares instead - then your individual actions could have a direct and measurable effect on the whole market; think of an elephant jumping into a swimming pool - even then your influence may not last very long, but you will have made an impact.

Why might someone want to do this? Well, there is the possibility of manipulating the market, perhaps to influence some other trade you have open. This is most often seen when a large institution has a large number of derivatives trades open and is also dealing in the underlying shares as well. By choosing one's moment one could trigger a favourable situation in the associated trade (- for example, a barrier option). This is illegal of course, but the burden of proof required is often too heavy for the regulators to make a case against you.

There is also the possibility of triggering a cascade effect (- presumably favourable to yourself); e.g. many traders use automated systems to buy or sell when a price hits certain levels - traders being human they go for round numbers, like 4000, or 3500; these are sometimes termed support and resistance levels. If the FTSE was wandering close to what you think many systems are using as a trigger level, you could make a large transaction, send the price across its trigger, then stand back as the computers take over.

These are only a tricks for the big boys though - it is unlikely the small investor will ever be able to indulge in such shenanigans as it would take an enormous degree of coordination and timing among a large number of individuals, who would also have to maintain secrecy.

Does this kind of thing really go on? We don't actually know, and aren't likely to either; someone is bound to have done it at some time, but the real point is however, is it that common? For if it is, the smaller investor is in trouble, as he has no way to defend himself against this. Situations to be wary of would include, e.g. the so-called triple-witching day when a lot of derivatives contracts expire; these times are likely to see a lot of frenetic trading as large players attempt to unwind and close out their various positions. The lesson here is thus to be aware of special dates in the financial calendar.

Filtering

Removing the noise component from a signal; throwing away what you see as irrelevant. Another name used is denoising; just remember that when developing your model, you do not buy the 'trend' of the share price, you buy it as it is.

Financial Mathematics

An academic discipline which attempts to use - mathematics - to analyze such things as stock market behaviour; an enthusiastic community of model builders, writing often rather impenetrable papers, e.g. 'EuroBond Volatility after a Market Crash'.

Academic research relies on open publication, which poses problems for anyone seeking practical solutions as trading on the stock market is a competitive game, the nature of which can change over time; so, if you found some technique which really did work and published it in the literature, then everyone would start using it - this would create a feedback effect which would change market behaviour, and ... invalidate your 'correct' theory.

The stock market is a game, the object of which is making money - if you know something, then you should keep it to yourself. Academics don't trade; and if they do come across some method which looks like it might work in practice they quickly hightail it out of academia to form their own hedge fund.

Fluctuation

A random movement of a quantity; which should be small and not important at all, you would hope, and not indicative of anything larger, i.e. not a trend

Front-end Loading

Mention this next time you talk to your independent financial adviser - watch him choke on his Jaffa Cake.

These are the charges which are paid upfront when you buy an investment product and can be very costly over the long term as the costs are effectively being compounded by being exercised at the beginning of the policy.

Fundamental Analysis

Evaluating a stock by assessing a company based on such factors as historical earnings, projected earnings, revenues, cash flow, and various financial ratios - the sort of thing found in the company report.

Fundamentals do not seem to play any part in the moment-to-moment development of the share price, except, e.g. company profits are announced and are better or worse than expected. At longer timescales, their effect does kick-in; fundamentals are thus good for looking at what we might term the underlying structural foundations of a company - we can perhaps find signals of unsustainable behaviour (- at some point the company will go bust), and indicators of good and bad corporate health.

In a nutshell - does the company make money or lose it? Does it look like it will/could start making money within a reasonable timescale? Being a fundamentalist one then assumes that these factors must, eventually, ultimately, be reflected in the share price, even though this can vary wildly over even extended timescales.

Of course, if the numbers used by the fundamentalist turn out to be nothing but fanciful fictions, the whole idea falls apart.

Future

A type of derivative. A firm contract to buy or sell the underlying security on a specific date for a specific amount.

Flotation

Getting listed on the Stock Market. An IPO - an initial public offering.

During the last bull market - the late 90s Tech Boom - there were an amazing numbers of IPOs. The market was so hungry for anything connected with the Internet that young entrepreneurs would become instant multi-millionaires; getting in on an IPO was very difficult for the smaller investor - you needed to have favoured-client status with the broker as it was tantamount to 'free money'.

IPOs are a lot rarer now, and there has even been a move towards public companies going back to private ownership (- you get to do pretty much what you like without interference from investors and regulatory bodies.)

Full List

The main market of the London Stock Exchange.

Fourier Analysis

Analyzing a signal by decomposing it into a superposition of sine and cosine functions (- types of curve that look like waves). Shows up periodicity, i.e. repeated behaviour very well. The foundation of classical signal processing.

Foreign Markets

While it is natural to concentrate on your home markets when trading, you should be willing to look further afield; in general one should simply go where there is 'most value'. Certainly, when confidence has accumulated one will wish to do so; but if you decide to take the plunge it is good to be aware of certain things.

Make sure the markets are liquid and that you have a broker who is competent and flexible enough to facilitate such trading; if there is a language difference make sure that there are good quality financial news media in your own tongue.

Finally, one must be aware of currency exchange rates as well - this complicates the issue; when calculating your expected return you have to be aware of the costs of changing back into your home currency. In 'normal' times the major currencies do not move around that much, but sometimes they do. This can make an enormous difference.

Fraud

A common sport among the business community and a good reason to read the company report with a healthy dose of skepticism.

Free Trade

The idealized operation of the market as described in the 'Wealth of Nations' by Adam Smith.

A nice idea, but alas, a bit of a myth; the big players are too powerful and too fond of such delicacies as - monopolies, cartels, price fixing, import tariffs on competitors, subsidies, tax breaks, predatory pricing, lock-in, offshore accounting ... and etc.

Free Market

An idealized situation, under which the markets work perfectly, bringing benefits to us all without any external regulation.

Free Advice

Do you really think this is worth anything?

Who is offering this advice? What are their motives? Why are they doing this? Why do they want to 'make money' for you

FSA

Financial Services Authority. The (- rather toothless by comparison) UK-equivalent of the US SEC.

The government body responsible for ensuring that the we, the general public, are not ripped-off, cheated and robbed by the professionals of the Financial Services Industry.

Fuzzy Logic

A calculus which is useful for expressing apparently vague, often linguistic notions, which defy any precise quantitative definition. Extremely useful, especially in high level control problems. Contrary to popular belief, the theory is based on a very solid mathematical footing; it is not itself 'fuzzy'. Often distrusted by the ignorant; mainly due to the off-putting name - 'we want definite answers, not fuzzy answers, dammit!'

Fuzzy Expert System

An expert system based upon fuzzy sets and fuzzy logic.

A wee example -

Rule 1 - if ( (management is 'weak') and (company is 'under-performing') and (company has some valuable assets) ), then (company will be subject to takeover bid)
Rule 2 - share price will 'rise sharply' after a takeover bid
Rule 3 - buy a stock if you expect it to rise sharply

This is a good example of how an expert system can generate a surprising strategy which goes against 'common sense' - for example, if a company was such a dog - such an underperformer, and the management were well known for their uselessness, mostly you should run a mile from their stock - no one sets out to buy rotten stocks after all; on the other hand, if they were really so very bad, but still had something of worth in their business, then the above scenario could materialize.

Note that 'underperforming', 'rise sharply', and 'weak' are fuzzy sets whose meanings we have to define, in some way. How we do this is to take some value, or in this case, it will be a set of values, and ascribe to them a membership degree of the fuzzy set, usually scaled to [0,1]. The classic example would be of the fuzzy set tallness, and where we measure height; so for example a person who is 5'6" might have tallness 0.2, someone who is 5'11" might score 0.7, and someone 6'7" would score 1.0 on the scale. The interpretation of the scale would be 'the extent to which a person can be considered tall' with 0 being not at all, 1 being absolutely, and 0.5 being neither tall nor short. There is obviously a great deal of leeway in this process of fuzzification

When provided with a set of facts, we can then apply the above rules to generate a conclusion, which in this case would be a recommendation to buy or sell some stock. In practice, your set of rules and fuzzy sets could be several hundred items in size; producing results could be a hefty computation.

The main attraction of such a system is that it is human understandable - the reasoning taking place seems pretty similar to the way we think; this is in stark contrast to, for example, the neural network approach - these are algorithms which we train until they perform well on test cases, but we use them like 'black boxes'; we feed them input, get output, but we do not get to examine the inner workings of the process (- it is possible, in theory, to extract rules from a trained neural net, but it is a fiddly business).

Not being able to examine the steps involved in the reasoning process can be a big worry in practice. Consider as a good example, the case where your system has produced a genuinely striking conclusion about a share price move; this could be a big money-making opportunity, or it could be an algorithmic error - with a fuzzy system you get to backtrack the steps involved (- and if they all seem reasonable, then we can probably believe the overall conclusion), but with the neural net we do not have this option. Big money-making opportunities usually have a big downside risk as well, so it would take a brave trader to make such a move.

In practice, a fuzzy system would usually sit at the top level of some data processing pyramid, where in the lower reaches one would have other data processing algorithms acting as classifiers. Or perhaps, even the other way around. Whatever you want in fact, or rather, whatever works best - and this is the whole point of the approach we take on data processing, one must simply use whatever is good for the job in hand, then combine these as subsystems, tailored to the overall goal; this could be described as Data Fusion, or perhaps as Hybrid AI.

Fund Managers

A cabal of vastly-overpaid stock-pickers claiming to have semi-mystical insights into the markets. They take our money and wisely invest it for us as investing is much too complicated for the layman. 'Star' fund managers are often venerated as heroes, their transfer between rival funds treated like that of sports stars, and their pronouncements within the financial media ruminated upon as if some sacred theological Papal Bull. We need fund managers because if we tried to invest by ourselves, on our own behalf, it would surely lead to disaster ... for the fund management industry.

The perceived expertise of the fund management industry is based upon deception and opportunistic window dressing - their claims are mostly just utter nonsense; the performance of fund managers as a whole is almost identical to that of a random sampling. Most never beat the market, and if they do so, it is largely by luck, and cannot be sustained for any significant period. The fund management industry is a £2Billion a year racket - their Porsches and Georgian houses are paid for by you! So please, do not give your money to these clowns to gamble with on your behalf - you would be better off choosing stocks at random for at least then you would be avoiding sky-high administration charges. Do yourself a favour, give them a big bodyswerve.

So much for the downside of fund management; the upside to the industry arises if ... you manage to become one yourself - lets face it, the pay, conditions and perks are excellent and you do not have to risk your own money; if the general public are dumb enough to pile cash into your "Dynamic Value Growth Quantum Macro High Income Asian Titans Fund", then who is to say they are wrong?! The customer is always right, after all.

In doing your 'job' (- makes it sound like digging coal for a living doesn't it!), there are two situations one must consider; in a bull market, all you have to do is to pick any old crappy stocks at all; as the general pull of the market drags them up to surprising levels, you can demand for yourself a large 'package' and bonus (- wages, to you and me) which is thoroughly deserved since you are such a genius (- making money in a bull market! Ain't you clever!) and the fund is doing so well.

In a bear market, you can no longer compare your performance in terms of absolute returns, but instead you must measure yourself against the sector average, i.e. against the rest of the fund managers who are probably no better than yourself. Generally speaking, just do whatever everyone else is doing, and if you somehow beat the average performance of your peers by a few points, you can crow about this, and demand for yourself an even better package for your 'outperformance' during difficult market conditions. If you fall below the low standards of your peers, then don't worry, no one will know, since it is not in your employers interests to let the world know how useless their fund managers are. Chances are you will keep your job, and if challenged about your performance, keep harping-on about the difficult market conditions. The absolute worst case scenario is leaving with a large severance package and a glowing reference.

This is all you really need to know about being a fund manager, but before you go off to post the application letter, better make sure you are Public School or Oxbridge or Family Connected or all three if you are really serious - no oiks allowed into this cosy club!

Full Disclosure

Rules which ensure the fair and full flow of information to all investors at the same time, not just to well-connected insiders.

Before there was selective disclosure - put simply, if you were big and well-connected, you could get out before a huge price drop, or get in before a big move up. If you were small, you had no chance. The game was thus rigged in favour of the big boys - but no one wants to play a rigged game; if investors start staying away then the whole market is in jeopardy.

FTSE 100

The top 100 stocks on the LSE. An index composed of these stocks

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