Glossary M

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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M

Malthus

Thomas Malthus, an economist, originated the theory that the human race was headed for extinction because human population grows at a geometric rate while food production only grows at a linear rate; since geometric trumps linear, by simple mathematical argument one can see that - we are all doomed!

Luckily, however, Malthus predictions were wrong - we are all here, and much more of us than there has ever been; ironically we now have an oversupply of food - a problem none of our ancestors would have anticipated - which is leading to severe health problems in the western nations, including obesity and diabetes.

It is easy to dismiss Malthus as an old-style prophet-of-doom, but while his original particular point is refuted, the general argument concerning ever growing consumption and the eventual exhaustion of finite natural resources, is still very true today. In the original argument concerning the food supply, it is technological innovation which came to our rescue, i.e. we 'invented ourselves' out of a tight spot; the big question is therefore - 'are we collectively smart enough to keep solving the problems we create for ourselves?' - or is our ingenuity itself a finite, limited resource.

Marconi

Marconi was once called GEC and was one of the most solid companies in the UK, a founder member of the FTSE-30; built up by Arnold Weinstock, it was often criticized for its overly careful approach to its business; for example, it owned many diverse companies doing everything under the sun - 'not core business' the City crowed, and had accumulated a large cash pile - 'where is the growth, where is the dynamism, where is the re-investment', crowed the City.

The telecoms boom in the 1990s had left a bad taste in the Marconi mouth as they had had the required technology for mobile phones very early on - a technical lead which was not exploited. The stodgy corporate culture was blamed for letting this gold plated opportunity slip through its fingers.

When George Simpson took over, a new culture was to be created; the masterplan was simple - put all the Marconi eggs in one basket (- sell off anything unrelated to the telecoms sector), then jump onto the telecoms bandwagon as a johnny-come-lately (- by buying lots of overpriced US telecoms companies at almost exactly the top of the market). This strategy was in retrospect optimised for disaster; had an ambitious saboteur wished to deliberately and actively destroy the company, this is exactly what he should have done, had he been an evil genius.

In its decline, Marconi was one of the best short-selling opportunities ever recorded as the share price slid downwards with all the certainty of a half-brick under the force of gravity. At least someone made money on this! The maximum fall was from 1250p per share to 1.25p, a loss of 99.9% - steeper than an Olympic ski jump.

Margin Account

An account that allows investors to borrow money.

Margin Call

A call from your broker asking for the deposit of additional funds into your account, to keep a trade open.

Market Abuse

A new criminal offence designed to replace, or rather augment, the current laws against insider dealing - the FSA never gets anyone on insider dealing, either being too gutless, under-resourced, or simply lacking evidence - it is usually too hard to prove a case. Market abuse has lower levels of proof, presumably.

Market Failure

Human beings have a wonderful talent for invention. One such invention is the Money-and-Market system; this lets us exchange and redistribute goods in an efficient way without the impracticalities of barter, and allows both the buyer and seller to get a fair price. Trade, we should point out, is really a good thing as it enriches society as a whole - without it we'd be back in the Stone Age. (Vast inequalities of wealth are undesirable, but the political arguments are really about how the cake is split - not whether we should have a cake at all.)

The ideal operation of the market system was set out by Adam Smith many years ago, and is commonly referred to as the Free Market - the basic idea being that governments should not interfere with their operation. (Although some critics have argued that even the idealized model cannot actually work, the argument is rather mathematical - so we'll leave that to the academics and restrict ourselves to practicalities.)

Since today everyone believes in Free Markets or at least Free Trade - what is the problem?

In theory, nothing at all, but in reality things are not so simple.

One particular problem we have today is ideology-driven economics, the principal feature being the imposition of market (so-called) "solutions" in situations where they are clearly inappropriate; if you want a good example, try taking the train in the UK (- a free market, and hence optimal, solution), then take another in France (- a state-run and hence, inefficient, system). Markets are often touted as universal solutions by those with vested interests, but they aren't.

But still, even this is just a side-issue; there are many problems even in situations where markets are the answer.

With all this money flowing around, all this wealth creation, the powerful find it impossible to keep their snouts out; taxes are an obvious measure - the King must have his cut. Everyone is so used to taxation these days, no one really makes a serious complaint anymore - a good example of 'normalisation' to a psychologist. But you should remember it is your money they are taking - there is no such thing as 'government money' - the government does not create wealth, you do; it is not therefore unreasonable to ask what they do with it and to expect value for money. In earlier times people took the tax issue a lot more seriously. Taxes on market transactions create a type of 'friction' which can reduce liquidity (- illiquid markets don't work).
Governments often interfere for legitimate reasons - to get the economy growing again, to protect their industries - but this can do more harm than good, take e.g. bail-outs - what message does it send to the business world in general if, to put it bluntly, screw-up a little and get sued or fined, screw-up enormously, and just let the government pick up the tab?
Everyone tries to beat the market - and there is nothing wrong with that, but insiders - companies/brokers/analysts/pundits/traders/fund managers, the big players will try to rig the system and actually be capable of doing it.
The dynamics of competition in the business world tend to result, eventually, in the existence of very few suppliers, you can then get monopolies and cartels formed which distort free trade - competition!? Forget about it.
Big companies also use political lobbying to arrange the following advantages for themselves; subsidies and tax breaks, import tariffs on foreign rivals and other types of protectionism; bail outs when they go bust, and naturally the awards of contracts.

The general attitude seems to be - I believe in Free Trade when it is to my advantage; when it isn't, I want the other guy shut-down.

Market participants are supposed to be a species called the 'rational economic man' (- homo economicus), but do in fact below to another group called 'real people' (- homo joe_punter). Real people suffer from certain problems when dealing with the markets, they have -

unequal opportunities to participate in the market
unequal access to information
unequal abilities for processing this information
again, unequal opportunities to act on this information, and
differing behaviours even when presented with the same information, with
different expectations as a whole

Real people participating in real markets leads to a lot of crazy behaviour. Bubbles, in particular, are a recurring feature of markets - these are a real phenomena, but are essentially distortions caused by mass cognitive dissonance and warped perceptions, usually fuelled by an army of market insiders 'talking up the market'. Since bubbles burst and things go back to 'normal' people tend to forget how destructive these events are - make no mistake, there is a massive redistribution of wealth going on here; insiders with better access to information than smaller investors can get out before the crash hits, while the little guys and other johnny-come-latelys get hosed in a manner little different from that of a Ponzi scheme.

There are always those who will say that markets are efficient, highly liquid, in equilibrium, and always work better than anything else; not all that say this actually believe it, but some do - a recent example was the American general who wanted to apply a market solution for intelligence gathering; the idea was to set-up a Terrorism Futures Market (- the 'BombDaq') and monitor the prices to gauge the likelihood of possible terrorist acts. If you truly believe that markets work as they are supposed to, then e.g. the price for the 'September Tel Aviv Anthrax Future' will represent the best information and hence prediction, that is possible for this event.

- But getting back to Planet Earth - it is obvious to anyone who hasn't spent their last decade in the looking glass world of the right-wing think-tank that this idea is clearly, utterly, barking, straightjacket-with-a-thorazine-chaser, mad-as-a-bag-of-weasels - like something out of Dr Strangelove. For someone responsible for security - i.e. the protection of his nations citizens - to create a scheme that gives financial incentives to market insiders (- in this case, ruthless terrorists), to rig the the system, and in doing so kill a potentially large number of people, is really quite shocking. Talking about 'making a killing' on the markets ...!

Markets and Myths

Market ideology has its own articles of faith, things which are assumed to be true, and even when proven to be false, are retained, since there is no other alternative. Included in this would be -

Markets are efficient
Markets allow the efficient allocation of capital within a society and in particular, channel savings into productive investment
Nothing can work better than the market, in particular, no centrally-planned state activity.
CAPM

There are plenty others, but the principal myth is that markets are a complete and perfect solution, to all problems, in all situations; in actual fact, they can be good solutions to a restricted class of problems if and only if a number of strong, restrictive constraints are satisfied.

Markov Process

A random process model in which the change of state depends only on the previous state, rather than something a lot more complicated.

Assuming a markov process when developing a mathematical model of a system is usually a cheap way to make some headway with something that would otherwise be intractable.

Market Order

An order to buy or sell a specified number of shares at the best available price.

Market Maker

A specialist market trader with a special responsibility for creating the market, i.e. being prepared to both buy and sell a stock; markets only exist when there is liquidity, i.e. the ability to both buy and sell. Market makers take on this responsibility in return for the chance to make themselves a profit; they do this by quoting a spread, i.e. a difference between buying and selling prices.

Similar to a bookmaker.

Market Share

The percentage of a specific market segment that is controlled by a player.

Market Dynamics

The dynamics of the financial markets are very complicated - you have a situation which is someway between total randomness and the existence of definite causal patterns; you have time series, which have some causal relationship with their past values and the past histories of other timeseries, but also non-numerical influences - news and fundamentals.

Complicated.

Market Top

The point at which the market heads downward.

Margin Trading

Investing financed by short-term borrowings. Not a good idea.

Mid Price

The price you will normally see quoted on an information service. Can be quite different from the bid and offer prices - ideally you want this difference, the spread - to be as small as possible, but this is set by the markets makers on their perceived risks. Spreads are low in high volumes and vice versa.

Mission

A goal, a purpose - our goal is to give you, the small investor, the most advanced data processing software in the world. Your goal should simply be to make money using it.

A mission statement, as issued by a company, is usually a collection of impossible dreams fantasised by the board after too much golf and tequila.

Monetarism

An economic ideology developed by Milton Friedman and the 'Chicago School'. The basic idea is to use strong control of the money supply to fight high inflation. Laboratories for the idea included Chile under Pinochet (- for a while, until the country was on the brink), and the UK under Thatcher, where it helped heighten class conflict to a dangerous level.

Money

What makes the world go round; the love of which is the root of all evil.

What we use to pay for things. An external measure of worth. Something which allows us to avoid the unwieldy-in-practice barter system. Central Banks issue paper notes which are deemed legal tender and hence will be honoured when purchasing goods or services.

That is how we use it, and where it comes from, but what is money, actually?

Er, ... money represents a deferred transaction - a trade that hasn't happened yet; a claim on wealth. To be honest, having thought about it, we don't know. Think of money as being like the lubricating oil in a complex machine. In a closed system its behaviour is quite straightforward, but things get very complicated when you consider a system with many countries, each with its own currency, all importing and exporting against each other.

Why do all the different types of money vary against each other?

Currency speculators make trades based on the investment environment of the owner country. When one country looks 'better' than another they will favour its currency. Big variations in the value of its currency create lots of problems for a country - exports are priced in your own currency, but since imports have to be paid for in foreign currency; you could suddenly find yourself 'living beyond your means'.

If currency fluctuation is bad, why don't central banks use a fixed exchange rate with respect to some external commodity of worth, or even just a 'harder' currency?

You could try this, but you might not be able to do it.

Are some currencies more important than others?

Yes. These are called reserve (- or simply 'hard') currencies and have a privileged status - the owner country also gains an economic advantage in its dealings with the rest of the world. The dollar is the most important example. Oil is priced in dollars which gives it further importance.

Is it good for a currency to be strong or weak?

If it is strong it means you can buy lots of imports cheaply, but makes your exports more expensive to foreign buyers, and vice versa.

Couldn't unscrupulous bankers and politicians just print lots of money to fund their plans?

Yes, in the short term, but then inflation would kick-in. If they go too far then self-reinforcing hyperinflation will take place and the currency will end up as worthless paper - historically, this has happened quite a lot.

Shouldn't money really be underpinned by something of intrinsic value?

Some people think so, others think it is unnecessary. In ancient times people used gold or silver coins; early paper notes were backed up by gold - this was called the gold standard. For many people this was a good thing - gold is relatively scarce, has always been regarded as having intrinsic worth, and its production is controlled - so it stops any 'shenanigans' from going on.

Many people still have a nagging worry that their savings might end up as worthless paper at some point; rich individuals have an especial fondness for gold, despite it being a really bad investment - gold prices have stayed flat for around 20 years; interestingly, high gold prices can be used as a good indicator of international tension; since it is the ultimate 'safe haven' when things are starting to look bad the big market players move into it.

If you wanted to reintroduce such an idea today you might want to try using a basket of commodities as the underpinning factor, e.g. a combination of gold, silver, other precious metals, and oil.

Is saving money good or bad?

Good for you, but perhaps bad for the economy. But maybe good for the economy. It depends.

Money Management

The basic philosophy behind StockWave is that accurate probabilities are the most we can possibly know about stock market price moves, and that the best trading strategy therefore comes from choosing a trade (- or more often some combination of trades) which optimises our expected return over the long term. (And StockWave can actually calculate the probabilities and find the best trades ... of course!)

But we can still screw-up bigtime here - the issue is one of money management, which hasn't really been discussed so far - you see, for our strategy to work we need to be able to apply it repeatedly a large number of times and let the laws of statistics work in our favour; what we then must not do is to allow ourselves to get wiped-out by a single (- or series of) bad trade(s).

Consider a guessing game

ten cups with a prize under one of them which we get to keep if guess right
cost to play is £1 per turn

Whether or not this is a good game to play depends, first of all, on the size of the prize -

If prize is >£10 then we can win at this game, if we can play it often enough, but
If prize < £10 we lose in the long run, and
if prize = £10 then the game is 'fair' and no one wins out overall in the long term*

(It also depends on being able to play many repeated games over and over - in a real situation you might not be able to do this, but in a real situation, the game is almost certainly "rigged" anyway - please don't EVER play "Find the Lady" on the streets against some out-of-work card-sharp cum amateur magician ... it won't do you any good ... and the guy who played it immediately before you did and won £30 was a shill in cahoots with the card-sharp ...)

Note that the chances of us choosing the right cup are 10:1 against, i.e. we will lose at this game 90% of the time whatever the value of the prize.

It is important to grasp this and not be confused - the point is that even if the win-loss probability is poor, the expected return can be good, BUT, you can only risk a -small- percentage of your total pot to bet on these types of trades; I hope this elucidates the distinction between expected return and probability of win for you - and why we need both of these numbers to make a trading decision.

Related miscellany of interest - quotes and observations

If the odds are definitely against you and you can't do anything to put them in your favour, the best strategy if you MUST play these games is the opposite of the above - e.g. in a casino, avoid machines, go straight to blackjack, bet heavily then leave, hopefully with a pile of casino cash
"Markets can remain irrational far longer than you can remain solvent" - JM Keynes
* - this is not quite right; if one side has deeper pockets than the other, he will win, even if fair
OTM options have no intrinsic value and will be very cheap especially if some way from the strike price - and almostly certainly expire worthless, but can bring in occasional big winners.
The whole field of probability was started by the Frenchman Blaise Pascal in response to his friends enquiries about using science to win at cards
Your money, fund managers and other peoples money - you might get the idea that I don't like fund managers - I don't; betting your own money is one thing, betting with another person's is quite another; professional traders under pressure to perform are encouraged to take higher risks and to use greater leverage, so when the money you risk is not your own, your appetite becomes skewed in quite dangerous ways, and of course, the longer you get away with this kind of behaviour, the greater it becomes magnified.

Monte Carlo Simulation

Monte-Carlo (MC) simulation is how we deal with the presence of randomness in a process; by generating many random walks, we can calculate probabilities for the outcome of an event. Used chiefly by scientists and engineers in many areas where exact solutions (- as would be expressed in a formula) are not possible, and lately by financial analysts for derivatives pricing.

MC methods need a lot of computer processing as you have to do many, many runs to get good accuracy in your result; the main drawback of the method is that the accuracy of your result only grows as the square root of the number of runs, i.e. slowly - if you want to be twice as accurate, you need to do four times as many runs. This problem can be attacked by incorporating prior knowledge of the state space into your importance sampling algorithm - but this is somewhat fiddly, and is a specific, rather than a general solution.

Monopoly Corporatism

The antithesis of the Free Market.

What we have today, many would argue.

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