StockWave Financial Glossary A

Glossary A

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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A

Accountancy Standards

Accountancy rules are of great importance to the investor; if they are too weak then company reports become little more than imaginative fantasies - and without a set of half-way believable numbers the fundamentalist approach to investing becomes a (-n even more?) pointless exercise ...

In the US, these standards consist of an enormously complicated set of rules (- the GAAP) written into a massive tome; designed to protect the integrity of the company report, alas, this has not prevented accountancy malpractice being at the centre of several large scandals. In the UK, there is less that is explicitly set-out in terms of strict rules, with a greater emphasis on 'principles' and 'guidelines'. Curiously, this relative loosening in comparison with the US, is meant to result in more believable reports - according to the UK accountancy lobby. Currently, there are moves being made to create an international standard for accountancy; in practice this will mean a lot of arm-twisting to facilitate the adoption of the - rather flawed looking - US system.

Advice

It is quite natural to feel confused when confronted by the financial world and so most of us will seek advice.

There are basically two kinds of advice - that which you pay for, and that which you don't. Free advice is likely to be worth exactly what you paid for it; paid-for advice is likely to be expensive and perhaps little better than the free advice. Whoever you consult needs to be paid for his time in some way - you should remember there is no such thing as an Independent Financial Adviser and in the end, nothing is for free. This advice was not free either, but we were paid when you bought a license for our software; moreover, there was nothing hidden about the costs involved.

Generally speaking, the financial services industry treats the public like children; 'we know best, do as we tell you', and if anything goes wrong it becomes a case of - 'best not tell the children' (- for their own good, of course). Our advice is thus to educate yourself, becoming in the process a sophisticated active-trader/investor - do not simply hand over your cash to someone else to invest on your behalf as the chances are they do not know any more about the markets than you do; all you are doing is paying their - often very substantial - wages for little or no added-value.

The first step in this education is to become financially-literate - you have to know what things mean; when you can read, e.g. the Financial Times all the way through and get the gist of most of it, you are well on the way. Next you must learn about the mechanics of trading. Finally, you must understand your own goals, in particular your attitude to risk, then you will be capable of making your own decisions - and here you at least start with out with a significant advantage - you are not paying fees to anyone.

Become empowered; do your own research; make your own decisions; trust yourself.

AI - Artificial Intelligence

A computational science which is concerned with the extent to which machines, i.e. computers, can be made to accomplish tasks most commonly associated with human beings; those which are associated with intelligence, i.e. learning, problem solving, pattern recognition, understanding language and vision. Most conventional computer science is concerned with what might be termed efficient computation; number crunching, algorithmic analysis, program and language design, i.e. much lower level stuff.

AI sometimes gets a bad press because the reality of what is actually possible falls far short of the fictions depicted on film and television; forget about talking robots and computers with emotions - instead look upon AI as a collection of useful techniques, each of great power within its domain of applicability.

Also referred to as 'Machine Learning'.

AIM

The Alternative Investment Market is the junior market run by the London Stock Exchange consisting of some 600 smaller companies.

Why should anyone bother with these 'small fry'?

Well, when the blue-chip stocks are in the doldrums, you may find much better value in the smaller companies; in general we would recommend that the confident investor just goes wherever he can find the most value - trade whatever, wherever, as long as it is liquid and you understand the risks involved; if the Mongolian Dead Donkey Futures market looks hot, then dive in - there should be no geographical barriers anymore.

Alpha

The alpha (- and beta) are measures of the riskiness of a stock - alpha being the residual risk and the beta being the sensitivity of the share price to market movements. These are calculated by plotting the stock movements against market movements and doing a linear fit; the alpha is the intercept and the beta is the slope. A high beta is a stock which is very sensitive to market variations, and vice versa. These quantities, alpha, beta (- and gamma, delta) - 'the Greeks' are most often discussed when evaluating the riskiness of a portfolio - you may hear of an investment strategy being 'delta-neutral'. The ScatterChart facility in StockWave gives an indication of these measures.

It is important when using these measures to bear in mind that they can change over the time period one uses to calculate them and can be quite different in different periods; for example if one chose a time period during which the market exhibited two kinds of behaviour, one would find that the plotted points formed two separate clouds. This means that one can have a situation where a stocks correlation with the market can change - which has obvious repercussions when trying to construct a portfolio. A good example would be the correlation of traditional stocks with the market index during the telecoms boom of the late 90s; during the period of the tech bubble, their relationship would be entirely opposite to that outside it.

Altruism

Acting for the good of others.

The Financial Services Industry is full of (- self-professed) altruists.

Amortization

An accountancy term - paying off a debt in regular amounts.

APR - Annual Percentage Rate

A simple summary measure which explains how much a consumer is being charged for credit. Lower is better - and please remember that a difference of 'only a few percent' can mount up in the long term, so shop around! This advice is especially relevant to credit cards; if you cannot pay off the total amount every month, i.e. you are maintaining a balance, you should find the lowest APR card you can. Luckily, the credit card industry is incredibly competitive, and so good deals are out there; do yourself a favour and become a 'rate tart'.

Analyst

A researcher-of-sorts who works for a merchant bank. His professed intent is to provide impartial advice about a stock; however, there is often a conflict of interest here and much evidence to suggest that analysts often find themselves pressurized into giving positive reports. Some analysts have even been sacked for insisting on giving negative recommendations, although a more common practice would be to have two sets of recommendations; the real and the official versions.

Best not to bother with analysts, their views are likely to be irrelevant, coloured, and their recommendations as likely to be wrong as to be right - but what about the brokers themselves? Can a stockbroker be relied on to provide well-analyzed, well thought-out information and recommendations?? A stock broker, ultimately, is in business to sell you stock - would you trust a used-car dealer to carefully analyze the available cars and sell you the best car for the best price? No; then why would you trust a broker to do the same?

Do your own analysis.

Annual Report

A beautifully-constructed glossy document issued by a company to present their results and impress shareholders and investors.

The worth or otherwise of the company report is discussed at greater length elsewhere; the usual advice about how to read one quickly - extracting the useful information while avoiding the hype - is to start with the notes and read it back to front - look for lawsuits, any odd accountancy changes, the state of the pension plan and always focus on detail. Don't waste your time with the management spin-doctoring.

If you are looking for long-term growth based on sound fundamentals, then you need to do a lot of deep digging on your own behalf, going well beyond the company report, which is really only self-promotion.

Anti-Competitive Practices

Companies who find themselves in tough, highly competitive markets against opponents who they can neither defeat nor be defeated by, often enter into informal agreements with their competitors to form a cartel, i.e. a price-fixing agreement. This is illegal (- for almost all industries, there being some curious exceptions), and very much against the spirit of the Free Market.

Arbitrage

The simultaneous buying and selling of the same thing in two different markets; this is done to exploit minor price discrepancies between these markets, in the process creating a risk-free profit. This is not a technique available to the private investor as it relies on transaction charges being zero or minimal; arbitrage opportunities tend to be rather fleeting anyway - they do not persist for very long; this is one of the reasons why real-time data is much more expensive than delayed data.

Auto-Regressive

A sequence of numbers whose values are defined by some relationship with the previous values. The interest of such functions from a stock market perspective is that one might expect such relationships to exist since traders trade by watching the chart of the share price and, at least partly, base their decisions on how they think it will move in response to past values.