Unpicking 10 phrases commonly used in investment but less commonly understood.
Jargon and acronyms are par for the course in the world of business. But don’t despair if you sometimes feel linguistically lost. Morningstar is here to help you understand various commonly used, but difficult to decipher, bits of business jargon.
A share or fund’s alpha is a measure of how much that security will tend to move during a period when its benchmark index does not move. The Beta, meanwhile, represents how far that security will move when the benchmark index rises one point.
The two terms are part and parcel of Capital Asset Pricing Model, a widely-accepted system for valuing securities in terms of risk and return.
A fund that increases in value while its benchmark index remains unmoved has an Alpha of more than one and would clearly be a welcome investment, which explains why some fund companies like to launch products with names implying this is the case, such as ‘Absolute Alpha.’
The Beta score measure volatility, in that a score above one means the share or fund will rise—or drop—more than its benchmark index. A score below one suggests it will move less than the benchmark and a negative score represents an inverse relationship, i.e. if the benchmark climbs, the fund or share’s value falls.
Of course these measures are based on past performance and as we all know only too well, yesterday’s stable performer can become tomorrow’s loose cannon.
Blue-chip is a term used on a daily basis to mean a large-cap company but its real meaning is often forgotten. It refers to the largest and best known companies and market reporters across the UK, including myself, are guilty of using it as a synonym for the components of the FTSE 100 index. However, the term implies not only size but quality so it could certainly be argued that not all of the 100 largest, listed companies in the UK are in fact blue-chips.
3. Cash Cow
A cash cow is a product or business unit that continues to generate profits on an ongoing basis at little additional expense following the initial set-up or acquisition costs. The term comes from the idea of a dairy cow, which, after the initial purchase price, can be milked on a daily basis at very little extra cost to the farmer. A fund or company subsidiary that consistently generates unusually high profit margins (so high that the profit can be used not only to manage the fund or maintain the business unit but can also be directed towards other business purposes) would be referred to as a cash cow.
4. Caveat Emptor
Not strictly a term that is exclusive to investment as it refers to all purchasers in general but either way it’s well worth remembering. Latin for ‘Let the buyer beware,’ the term originates from property law but can be applied to all forms of purchase. For example, if on the receiving end of some financial advice, it pays to ask yourself what the adviser stands to benefit: if you lose money, will their income and reputation also suffer or will they still earn a one-off fee irrelevant of your loss? If the latter is the case, then caveat emptor.
Okay, so we all know what commodities are but it’s their prices that sometimes confuse. Commodities—whether ‘hard’ such as gold, silver, copper and zinc, or ‘soft’ such as coffee and cereals—can be sold either at spot price or at forward price. The spot price is the price for goods sold for immediate delivery, i.e. the cost of one barrel of oil to be received today, while the forward price is for delivery at a pre-agreed time in the future, such as one barrel of oil for delivery in February in 2010. The forward, or future, price is affected by supply factors so if Mexico’s coastline is hit by a hurricane, the future price of oil was rise due to difficulties in supply.
6. Dead Cat Bounce
Another animalistic description and one that is regularly bandied around trading rooms; dead cat bounce describes a feeble stock market rally following a sudden and large fall. The charming image of a deceased feline’s slight ‘rebound’ when dropped from a height is intended to illustrate that investors are unconvinced that the market has turned, instead believing that shares will either remain stagnant for the time being or even fall further before recovering at a later date. This is just one of many imaginative terms used in chart analysis to describe various scenarios.
When a company declares a dividend is to be paid there is a waiting period during which, if a shareholder was to sell up, he or she would lose their claim to that dividend and it would pass to the new owner of the shares. The ex-dividend dates marks the day from which shareholders can sell their shares without inadvertently selling their dividend, happy in the knowledge that the dividend is still coming to them. As such, a company’s shares tend to fall on the ex-dividend date as investors wishing to sell will wait for this day so as to not lose out on their dividend income. For example, if a company declares a dividend on December 23, with an ex-dividend date of March 1 and a dividend payment of April 1, any shareholder selling between late December and the beginning of March will not receive the dividend payment in April, instead the new owner will claim this dividend despite having only held the shares for a few months. After March 1, the shareholder can sell his or her stake and still expect a cheque come April.
8. Stalking-Horse Bid
We’ve had bovines and felines, now it’s time for equines. A stalking-horse bid is something that has become more common in recent years due to the economic climate. It is a phrase that describes an initial bid on a bankrupt company’s assets, usually from an interested buyer selected by the bankrupt company itself in order to set the minimum price they will consider on the liquidation of their assets. The idea behind the bid is to prevent low-ball offers from rolling in and forcing interested buyers to engage in a bidding war and to instead sort the wheat from the chaff by attracting only ‘serious’ buyers. Once a stalking-horse bid has been received, the company facing bankruptcy can then open its doors to other competing companies to table their own bids in the hope that its creditors will achieve the best possible price.
9. Triple Witching
Sometimes referred to as ‘freaky Friday,’ triple witching occurs on the third Friday of every March, June, September and December when stock options, stock market index options and stock market index futures all expire on the same day, leading to increased trading volumes and volatility as traders try to offset their options/futures orders before the closing bell. Quadruple witching is when single-stock futures also expire on the same day as the other three securities. Of course, these occurrences are of minor interest to long-term investors as the impact on their portfolio is minimal to say the least.
10. Year End
This might seem like an obvious one, but year end causes many a problem for junior financial journalists who struggle to grasp the concept that the summer months of 2009 might be referred to as the first quarter of 2010. So, it’s worth remembering that year end does not necessarily mean January 31 but rather the end of a company’s or investment vehicle’s accounting period. For annual interest accounts, the year ends on November 30, while individual savings accounts (ISAs) end on April 5, and public companies’ accounting year end date falls on the anniversary of the end of the month in which is was first registered. Companies often request to change this date, however, to coincide with the end of the tax year or to avoid busy trading periods, or even to coincide with a parent company’s own year-end date.
The original version of this article was published December 2009 on Morningstar.co.uk.
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person’s sole basis for making an investment decision. Please contact your financial professional before making an investment decision.