Glossary I

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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I

Ideal Mindset for Trading

Cool, non-emotional. Detached. Zen-like.

Idealized Models of Markets

see Free Market. See Efficient Market Hypothesis. See entirety of classical economics.

And usually of no help to the investor.

IFA

Independent financial adviser. Allegedly.

Use at your own risk.

IMF

The International Monetary Fund; two definitions, you choose -

A group of bankers who travel the world creating situations of economic-disaster-waiting-to-happen, then reappear when the disaster has happened, to scold countries and their foolish rulers, then prescribe some economic medicine leading to a social disaster for the countries citizens. Responsible for more deaths than the Great War. See World Bank.
An alternative definition would be a group of Wise Men who maintain the integrity of the international economic system, through which wealth shall be created and bring prosperity to the worlds poor. Have saved more lives then penicillin.

Inheritance Tax

A minor hurdle; a danger only to the very careless.

If you are worth a lot, and are getting on in years - then you should be planning how your estate will be passed on; there are any number of experts who can aid you in this, but you must start early.

In Play

A stock that is known to be a candidate for a takeover or merger. Bidding wars ensue; likely upward movement.

Internal Markets, Accountancy

Sometimes large organisations split themselves for accounting purposes - this allows a bewildering variety of schemes to become available to the clever accountant. One of these is the use of internal markets; suppose I have something in my left pocket and I transfer it into my right; left pocket becomes Left Pocket Plc and right pocket similarly, while I am Me Plc, my pockets being subsidiaries; the transfer between these subsidiaries looks like a monetary transaction, but nothing is changing hands - an accountant can make this look like a sale, plus a cost. Do this many times, between many sub-elements and one can generate an audit trail of what looks like frenetic economic activity.

But what is the point you may say, as the net effect is zero? Well, this is true, and this is where the fraud enters - suppose in the midst of all this miasma of transactions, one or two are lost/mislaid/delayed/deferred, or re-categorized - what happens now is that spurious profit figures can be generated, and done to taste and necessity. Hey Presto!

A company with an incredibly complex structure is usually a sign of something very dodgy indeed.

Intraday Chart

A chart that tracks the minute-by-minute trades during the day, i.e. one that shows tick data.

Intuition

Is a perfectly respectable attribute to use when attempting to analyze data; it is a form of cognition, probably the product of some information processing being conducted by the unconscious mind. All investigations need a place to start, however at some point one has to back them up with hard evidence and rigorous analysis.

Insider Information

The only sure thing. And quite illegal

Insider Share Dealing

The use of insider information to deal in shares is completely illegal, as it should be. Share dealing by insiders is not by itself, illegal - but the use of privileged information is. There are thus quite strict rules regarding share dealings by insiders.

Obviously, share dealing by insiders is of interest to those on the outside, but the correct interpretation may not be as clear-cut as one would think. Naively one might think - the directors are buying a lot of stock, so that is a buy signal, and vice versa. The crucial question is whether or not the insiders are putting up their own cash, rather then being awarded/exercising stock options, or being 'given' the shares in some manner.

Remember that just because a director 'believes' in his company, does not mean he is right to do so

Investment Strategies

It is usual when investing to buy a variety of stocks. Collectively, this is known as a portfolio. The central question of portfolio theory is this - by buying a collection of individual stocks, is it possible to almost guarantee a good level of profit, while eliminating the risks.

With a number of stocks it is possible to hedge, e.g. if you have one stock that usually falls with rising oil prices, then it would be sensible to buy another which rises when the oil price rises - thus you have largely insulated yourself from the risk of fluctuating oil prices. The possibilities here are endless - this field is known as risk management.

'Don't put all your eggs in one basket'.

Investment Competitions

Every year The Herald newspaper runs an investment competition for schoolchildren. It is usually very closely fought, and the winners may have to make better than a 40% return. This is a fantastic profit level. But it does not necessarily mean anything.

Let me explain.

If you took a large body of people and let them invest simply by choosing stocks at random, the chances are that one of the sample group would make a return of this size, purely on the basis of chance. For the stockpicker to have any particular skill over and above simple luck he must outperform everybody else over a much longer period; I am not denigrating school kids here, simply trying to explain the nature of statistical fluctuations, and how it is very unwise to extrapolate from a small sample of data. If however, the same school kids averaged a 40% return over a 10 year period, I would seriously consider letting them run my pension, or perhaps the entire country.

The arguments applied here to the kids apply equally well to the fund managers. Only more so. Be wary of performance figures quoted in advertisements - the time period is often chosen with care, e.g. 'Last year we did brilliantly' but they fail to mention that their fund has been a complete dog for the previous 5 years. The realisation that the fund managers were so poor led to the incredible popularity of tracker funds (- the extreme opposite of the actively-managed fund) in recent years; these of course, have their own obvious problems - i.e. when the markets are falling.

Invisible Hand

see Free Market.

Investing Styles, Ethical considerations

Corporations are not in the business of creating positive social outcomes; they are in the business of making a profit for their shareholders (- some of them, at least). One may argue that, on the whole, positive social repercussions are the by-product of corporate endeavour via the dynamics of the Free Market (- except for the odd bad apple), or one can argue that corporations are wholly amoral, or even evil. This is a political view, and open to argument; what state would we be in without the corporations? Better off, or much worse?? Discuss down your local student union while drinking subsidized beer ...

What is not ambiguous is that some companies are engaged in activities which are completely negative in their impact - tobacco companies (- cancer, respiratory disease), weapon manufacturers (- death!) or, perhaps stretching it slightly, junk food sellers (- obesity, diabetes). This represents a dilemma for the average middle class person, who is on the whole, fairly liberal-minded on social issues, but still wants to make a profit.

The extremes of the moral aspects of investing can be summarised as follows -

amoral-rationalist - invest in whatever is likely to make the most money based upon scientific analysis of available data. Non-judgemental.
tree-hugger - wants capitalism to be nice. Believes it can be reformed. Disturbingly naive; very common among educated middle class. Still greedy, still grasping for personal advancement, but wants to retain sense of moral superiority. Value systems keenly held. But the children MUST go to a good school! Buys ethical funds. Checks up on the FTSE4Good regularly.
evil-nihilist - the principal qualities of the Human Race are precisely the seven deadly sins. Sin outweighs virtue; evil trumps good. We all revert to the beasts in the end. We only avoid Sin if we accept that we are only beasts, and discard our pretensions towards civilization and higher values ... rant rant ... yada yada yada. For the long term this person finds it hard to beat; alcohol, tobacco, guns, drugs (legal or otherwise), pornography, prostitution ... would invest in the Colombian cocaine cartels, if they were listed on the NYSE. And why not? At least this is one business that can reliably turn a profit, with a continuing uncontrollable demand.
moral-tactical-sophisticate - act like an amoral-rationalist; then say, does this make me feel uncomfortable?

Which one are you?

IPO

Initial public offering. A company listing its shares on the stock market.

Iron Butterfly

Yet another ridiculous name for something quite mundane - you've guessed it, another options strategy; in this one you combine a long straddle with a short strangle or vice versa, all contracts having the same underlying security and expiration date.

ISA

Individual Savings Account - a tax shelter. Son of the PEP.

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