Glossary S

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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S

Sales, Sales Forecasts

Common types of announcements which will move the share price in an obvious manner. Typically, these will be a little better or worse than expected; sometimes they will be catastrophically bad, and it will be a shock - this type of situation should be pre-released to the market as a revised earnings forecast or a profits warning.

Sarbanes-Oxley

New rules brought in in the wake of the largest corporate scandal in US history, i.e. Enron.

Described in the financial press as 'onerous' and greeted with much wailing and gnashing of teeth, they really are little more than a slap-on-the-wrist; everyone makes a big fuss, then its business-as-usual. Will cause no problems at all for the big boys but will perhaps strangle the small businessman (- if there are any left in the US).

The gist of all this legislation is that - you shouldn't destroy documents. This is obviously a problem if your behaviour is slightly shady - in past times you could shred the evidence and claim legitimate ignorance.

S&L - Savings and Loans

The US equivalent of the building society, designed to provide loans to those wishing to buy a house, up until the 80s were strongly regulated; it was then decided however, that deregulation would be a much better idea. Disaster followed quickly as you might imagine - larceny, excess, ill-considered ventures, fools getting out their depth and sharks moving in to strip the unwary of their assets.

Scams

The ingenuity of the criminal mind in separating the public from their money is truly astounding; here are just a few of the cons which have arisen over the years. Some are quite old, but have been given a new lease of life via the internet and email. If you see any of these, run a mile; in the meantime have a chuckle at the gullibility of people.

The grand-daddy of the con is a man called Ponzi and his eponymous scheme; we know these better today as Pyramid Schemes. Someone gets a small group of people to join a scheme whereby they give their money to the person who introduced them to it, then continue on their own behalf to find a group of investors who they will then induct into the scheme, and so on. The person introducing the new joiners gets a payment, and the new joiners continue the scheme. A moments reflection, or some knowledge of elementary mathematics (- the factorial function), will see that to keep the scheme going, each generation has to be much larger than the last; inevitably it collapses as there just aren't enough people to join (- after several generations you end up needing more people than there are on Earth!) The people at the top of the pyramid walk away with all the cash, everyone else loses money.

The pyramid scheme is resurrected every so often for a new generation of mugs - one recent incarnation was called Women Empowering Women; interesting in that the fraudsters had added the new element of progressive sexual politics to the mix; of course there is an open-ended angle to this - look out for pyramid schemes which target black people, Asians, Christians, gays ... whatever. Note that fraudsters are true egalitarians in this respect - black/gay/disabled/Muslim money is as good as anyone else's - fraud goes 'Equal Opportunity'!

The most successful pyramid scheme in recent times was the one in which the entire population of Albania invested; unable to get their money back, the entire country descended into anarchy. One hangover from communism was the free and easy availability of automatic weapons (- grandmothers with Kalashnikovs) and even rocket-propelled grenade launchers. With the entire population of the country on the streets, armed to the teeth, angry as hell, and spoiling for a fight, the police and armed forces remained in their camps, while the government fled. Which is an interesting spin on the 'democratic right to protest'.

Pyramid schemes are also known as gifting schemes, so watch out.

Cold Calling is when you get a phone call from a very personable and interesting young man or woman who is telling you that you have been 'specially selected' to be offered an amazing investment opportunity, something so good that you will have to move very quickly to get into it. This is very likely a Pump and Dump scam, conducted from a 'boiler-room' (- cheap accommodation with too many folk crammed in and with no air conditioning) - it is designed to appeal to both our greed and our vanity, but is simply high-pressure selling designed to get you to buy worthless stock.

Nigerians/419 - you will receive an email from a Nigerian telling you of how there are large amounts of money in a foreign bank account, which at the moment cannot be accessed. The person needs your help - i.e. money - to access this cash, and promises you a share in the larger amount when it becomes available. You will typically be asked for several thousand pounds to share in couple of million. The email will usually begin with something like - 'this is a genuine offer'. This scam originated from Nigeria, for some reason, though it may come to you in other guises.

Business Opportunity letters through the post offering you a 'franchise' or an 'agentship' or a 'directorship' in some marketing enterprise, if you send a cheque for £500.

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Home-working - make £££s by working from home; its easy! You get sent a lot of parts which you have to assemble; you send them back, expecting to get paid, but you don't; you phone up to complain, only to be told you didn't do the work 'properly'.

Scratchcards - get three gold stars, and you have won a prize. To claim your prize you have to phone a premium rate line for at least 5 minutes; at the end of this you get a prize claim code; you then have to write off to the company with your code, the card, plus stamps for postage and various other information to get your prize, which will take at least 28 days. If you do everything right, and I mean absolutely everything to the letter (- and remember that these cards have an incredible amount of small print on them), you may eventually get some useless piece of junk (- a nasty ornament, say) sent to you in the mail; it will be claimed that the junk has a genuine value of £50-100 but you find when you try to sell it, no one will give you anything for it.

The National Lottery - is in my opinion, no better than a scam; people do become millionaires, so technically it isn't - i.e. the prizes do exist and are distributed, which may not be the case with telephone scratchcards for example, but really, you have sod-all chance of winning the lottery. Forget about it. And never mind Billy Connolly - he's already loaded; if he won the lottery, he wouldn't notice!

To those of you who have just discovered the Internet, be warned that the newsgroups are full of 'scam-spam'.

A particular UK phenomenon (- wet weather sufferers dreaming of a 'place in the sun') seems to be timeshare and holiday club fraud, the popularity of which never ceases to amaze.

Now, this is all very entertaining - laughing at the gullible is really enjoyable, and makes us feel superior. Well, consider the respectable scams which UK investors have fallen for in recent years; pensions mis-selling, endowment mortgages, with-profits life assurance policies, high income bonds, split capital investment trusts, and pensions, again and again. These have been in some cases, little better than some of the above - hence the need for caution when it comes to money; you cannot afford to trust anyone, not even the 'professionals'.

Furthermore, consider the legion of investment analysts who constantly touted overblown stocks during the Tech Boom, citing the 'new paradigm' of the New Economy, and that somehow we had gone 'beyond boom and bust' - are these respectable professionals any better than scam artists?

Generally speaking, it is important to remember that new scams are being invented every day; the con-men are always one step ahead and so one must guard against complacency; just when you think you have heard of everything, that is the time someone will take you for a tidy sum! The defences we must use are our skepticism -

Never be rushed - if they want money now, then walk away.
Never get involved in something you do not understand - keep asking simple questions; do not be embarrassed by your lack of understanding.
Get a second opinion; have a cooling off period of a day or two.
Ask to see the numbers.
Insist on hard figures - how much can I make, what can I lose; what are the chances of me losing.
Get it in writing; have documents independently assessed by a lawyer or accountant.
Do not feel obligated to them just because they gave you tea and biscuits!
Never, ever, sign anything at the time; never ever hand over money or credit card details

and also our intuition; if you have done all the checks you can do, but you still feel there is something not right - just walk away. These rules apply to any situation where you are handing money over to a stranger.

It has been said that an honest man can't be cheated; to which we would strongly disagree! But there is an element of truth in the saying; the people who are taken for the greatest sums by the fraudsters have often been hooked by their own greed.

Security

General term for a stock, share, bond; anything which can be traded.

Short

'Going short' means to sell.

Short Interest

The number of a company's shares that have been sold short and not yet repurchased.

Short Selling

Selling a security you don't own (borrowed from your broker) with the intention of buying it at a lower price to replace the borrowed shares. Short sellers are betting the price will go down. The broker will borrow those shares from another account and lend you the shares to sell short; this is all done with mirrors; no stock certificates are issued, no paper changes hands, no lender is identified by name.

It should be noted that this kind of trading is not always available to the smaller investor, but equivalent trades are available via derivatives.

Speculators

People who trade securities for the express purpose of making a profit on some expected change in their value rather than for any interest in owning the goods themselves.

Speculators sometimes get a bad press and are often blamed for disasters. However, it is important to realize that speculators provide liquidity to the markets which is essential to their proper functioning. Next time you buy something, perhaps you should thank the speculators for helping to maintain lower prices than would otherwise be possible. Speculators who short-sell stocks are often bringing a long overdue dose of reality to soaring share prices.

Speculative Instability

The movement of a share price can feed-back upon itself leading to bubbles and crashes.

Suppose for some reason a stock rises sharply, initially in response to some specific event - e.g. the company are awarded a patent or a big contract; this rise is noticed and a further group of investors decide to buy the stock (- simply because it went up), this sends the price soaring even further and so even more people decide to buy the stock; as the cycle repeats the price can be driven to enormously high levels without the influence of any further external events - it simply goes up, because it went up before, and without any apparent connection to its underlying state. Eventually, the share price is at a level well beyond any connections with its fundamentals, i.e. the ability of the company to generate profits. Someone notices this and decides to takes his profits as the current situation is unsustainable; the price begins to fall back, and others follow his lead; soon we have a selling frenzy and the share price will dive sharply, crashing back to levels which may be unjustified. The effect is a bit like a rollercoaster - once it gets moving it has a momentum of its own.

The dilemma for the trader is in knowing when to get in and get back out again to maximise his profit; mostly he doesn't care about 'fundamentals' - these only seem to matter in the long term, and as long as a stock is going up, profits can be made. Even if you believe a correction is coming, you do not know when, and so you are trapped by the twin demons of getting out too early (- lost profits), or staying in too late (- the crash hits). As the share price oscillates, no one can ever know whether the last movement was just a fluctuation or the start of a new trend.

In reality, the situation is even more complicated; suppose when the price started to fall back a bit, a new group of investors who were eager to buy but found the stock too expensive, now thought the share was 'cheap' and they piled in - now the stock shoots back up again; the original sellers start to think they made a mistake ... and so on, and so on. It is all very complicated, and just to make it worse, we can have derivatives traders and the presence of hedge funds who may aggressively short sell in order to create a crash situation - they will make lots of money if they can make the price fall.

All the different players, each with their differing objectives, acting at their representative timescales come together to produce the overall behaviour of the market; it is, essentially, this difference of opinion which stabilises the markets, and produces liquidity - everyone who wants to buy needs to find someone to sell, i.e. the buyer and the seller need to be in disagreement about the future worth of the stock. It is when everyone agrees that disaster will strike!

From a wider perspective, this suggest that the market system is intrinsically unstable - which is very worrying given the wider social consequences of market crashes. Over an extended time period, information flows to the market, and knowledge is gained by the traders; this leads in the normal way to the formation of the fair market price, but there is a further danger - with the gain of knowledge, there is the tendency for a consensus to form about future values, which leads to instability.

Spread

The gap between the bid and the ask prices of a security. Low is good.

Split Capital Investment Trusts

The latest financial scandal to hit the UK.

Sold as low risk investments and heavily advertised by a bizarre campaign which suggested stock market investing was better than sex, many investors who bought these vehicles lost all of their money. The crux of the problem seemed to be a magic circle of trusts which invested in each others stocks - this creates a kind of 'self supporting circle' which can artificially inflate the values of the participating trusts; of course a structure like this is simply a house of cards, fragile, and when one collapses, so do they all. It is reminiscent of the Lloyds insurance problems some years ago - insurance groups of 'Names' would lay off insurance risks against each other, reinsuring over and over again - making good profits for a while, but when large disasters struck found themselves liable for massive payouts.

Stock Splits

Sometimes the numerical value of a share price gets very high, say £50; the size of this figure is slightly inconvenient for traders, so the company decides to issue, say 5 new shares for every old one, thus valuing the new shares at £10 each, which is a more reasonable figure to trade with. Traders like to trade in round figures - multiples of 1000 and so on.

One side effect of this action is the need to adjust the historical data - otherwise it will look like some collapse has occurred on the share price graph, while nothing has really happened.

Stop-Limit Order

A variation on the stop order; a stop-limit order will be executed only at the limit price, not higher or lower than the limit price. In contrast, a stop order will be executed at the stop price, or, should the stock gap up or down, at the higher- or lower-than-stop price.

Stop Order

An order placed at a price that is higher (a buy stop) or lower (a sell stop) than the current market price. Buy stops are used by short sellers; sell stops are employed by investors who trade long. Both are used to protect profits and limit losses.

Settlement

This is the time when the money relating to a share transaction actually changes hands.

Stamp Duty

A tax, currently 0.5%, which you have to pay on all share purchases.

A very good reason why you should not buy shares.

Signal Processing

An engineering discipline concerned with extracting signals ('true values') from noisy or corrupt data.

Shareholding and Democracy

To paraphrase Winston Churchill, democracy is a pretty flawed political system, but it is by far the best one anyone has thought of - its problems are best solved by having more of it, not less.

The power of corporations, their incredible ability to get just what they want from the politicians, as and when they want it, is therefore worrying. Corporations are accountable to no one; even in law the corporation exists as a separate 'person' from those who run it. In theory, however, the shareholders - i.e. the actual owners - control the company; they can vote on major issues after all; but please don't think that your 1000 shares in ABC Corp means the CEO is hanging on your every word. The proto-democratic constitution of the corporation is blown apart by the power of the institutional investor, i.e. pension funds and life insurance companies, who will use their massive block votes to, almost always, support the status quo. Institutional investors are very conservative organisations; change, radical ideas, the setting of precedents, are anathema to them; thus, your 1000 votes against the bloated options and bonuses package for the new CEO will be trumped rather soundly by the 28.7 million votes of XYZ Life Fund, and the 13.4 million of DEF Insurance Ltd. Too bad.

When the management of a company are so egregious in their behaviour that even the institutional investors are appalled, it is still unusual to find them supporting shareholder activism; they will simply sell the shares and walk away. The overall result of such behaviour is that shareholder activism, which could potentially bring a taste of democracy to these unaccountable giants, is largely toothless.

From the viewpoint of wider activism, though, the purchase of even a single share can be of much use - as a shareholder, you are entitled to attend the annual general meeting, receive a copy of the company report, and are even allowed to inspect headquarters on certain dates each year. Try it sometime.

Shareholder Equity

Represents the amount of money the investors have invested in the company. (Something of an accounting convention.)

Sod's Law, Financial version

When everyone 'knows' something is true - when it is as obvious as it can be - this is the point at which it will be proved wrong, because in this case everyone will move in the same direction at once, and disaster shall occur. For this reason, we suggest that if you are doing rather well, keep your analyses to yourselves, at least until after the position has been closed.

Spread-Betting, and the Nicknames

Spreadbets are simple bets on market movements; you buy a certain amount per point, in doing so exposing yourself to the full fluctuations of the market. Large profits and losses can be made, and it is quite exciting. Not particularly well known to the stock trading investor, spreadbets are often the tool of choice of the market professional, being free of tax. Spread betting is also not as regulated as share trading.

A recent case of spread betting made the front pages of the financial press - the participants were two colourful characters who went by the nicknames the Plumber and the Spaniard. The central event was a very large spreadbet made by one on the share movements of his own company. When details emerged of this bet, a great many eyebrows were raised - was this insider dealing, was it legitimate or not? In any case the spread betting firm accepted the bet, a fact which surprised even the participant. Initially, the share price rose, and the deal was in profit.

The outcome and the story can be gotten elsewhere - what is interesting here is the grey area it identified; was this market manipulation, insider trading, an honest trade, or something fiendishly clever. The last possibility needs some explanation; the punter must have known that if it accepted his bet the firm would have to lay off its own exposure to the market; the only way this could be done would be via another party, the net result of which would probably be a large purchase of shares (or their equivalent), which would push up the share price. So, by understanding the dynamics of the market, it is possible to create favourable outcomes; the big question is whether this was done with specific intent, which would be manipulation, or simply honest confidence that his company was undervalued?

Stakeholder

A meaningless political phrase; someone who has a 'stake' in something, which makes it sound like ownership, which it isn't. Started to be bandied about as a buzzword relating to the so-called Third Way (fig-leaf for caring) Capitalism. Now used as a name for a type of cheap pension for the low paid.

The only way you can have a stake in a company is to buy shares in it. Companies only care about their shareholders, and only the large ones, even then - no one else gets a look in.

Stochastic

Another term for random.

Terms you might hear in connection with this are stochastic process (i.e. a random walk) and stochastic calculus (- used in derivatives pricing); note that this is unconnected with the so-called stochastic indicator of technical analysis; this is simply an oscillator which is used to generate over-bought and over-sold signals.

Straddle

A position consisting of a long (short) call and a long (short) put, where both options have the same strike price and expiration date.

Strangle

A position consisting of a long (short) call and a long (short) put where both options have the same underlying, the same expiration date, but different strike prices. Most strangles involve OTM options.

Subsidy

Government money, i.e. taxpaying citizens money (- your money, my money), given to businesses by the government to help them out. This practice is widespread throughout the world, even in the so-called free market western economies. World trade organisations are attempting to make these practices illegal, to encourage genuine free trade, but there are many ways for a subsidy to be paid - tax breaks for example, or by imposing import tariffs on foreign competitors.

The UK farming industry is one of the most highly subsidised in the world, mainly through the pan-European CAP (Common Agricultural Policy) - this idiocy results in such craziness as farmers being paid large sums not to grow crops, warehouses full of perfectly good produce destroyed so that market prices are maintained, and huge compensation payments made for such self-inflicted crises as the Foot and Mouth epidemic (- a non-fatal disease, which can be inoculated-against for less than the price of cup of tea.)

The US steel industry is currently being similarly 'helped out' by US President Bush.

Like speeding on the motorway; it is wrong, but everyone does it.

Synthetic Long Call

A long put and a long stock or future.

Synthetic Long Put

A long call and a short stock or future.

Synthetic Long Stock

A short put and a long call.

Synthetic Short Call

A short put and a short stock or future.

Synthetic Short Put

A short call and a long stock or future.

Synthetic Short Stock

A short call and a long put.

Synthetic Straddle

Futures and options combined to create a delta neutral trade.

Synthetic Underlying

A long (short) call together with a short (long) put. Both options have the same underlying, the same strike price and the same expiration date.

Options strategies listed out like this may seem perplexing; do not worry about it. You do not need to know what these are and when and why they might be used - the TradeCreator facility in StockWave allows the user to create and experiment with arbitrarily complicated trading combinations involving stock trades, CFDs, options and spread bets, and to see visually what kind of payoff will result. Play around; see what works; trade.

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