StockWave Financial Glossary D

Glossary D

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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D

Data Fusion

Data comes in many different forms. Ideally we would like to gather up all the data we believe to be relevant, altogether in a pile, then, somehow, squeeze all the information from it. Alas, this is usually not possible; the problem is mainly that, for much of the time, we are trying to compare or combine dissimilar things. E.g.

- How much is 3 apples plus 2 oranges multiplied by 2 and a half bananas?

Questions like this simply do not make sense.

With regard to the stock market, the problem we face is in combining timeseries with textual information sources; StockWave will soon incorporate algorithms which will allow this combination, this data fusion, to occur.

Day Order

An order to buy or sell stock that expires at the end of the day.

Day Trading

The practice of trading on market fluctuations during the day and closing out positions before the end - never holding stock, or a position for more than a few hours. The daytrader hopes to lock-in profits from market movements over small timescales.

There was something of a boom in day-trading some years ago - quite a number of dedicated facilities were opened with state of the art trading stations (- real-time quotes, Reuters news feed, etc), and many people gave up real work to try their hands at it. Most found it to be rather harder than they had imagined; for every case of a big win, there would be ten severe losses. The practice further gained notoriety over a couple of well-publicised cases where traders, having racked-up large losses, proceeded to 'Go Postal'. A sad business; since then the daytrading world has cooled considerably.

What went wrong?

Well, a lot of foolish people got attracted by the prospect of 'easy money' during the last market boom, encouraged to do so by greedy brokerages; when trading on very short time scales, you are subjecting yourself to what is almost purely noise, which is utterly unpredictable; plus, despite the excellent facilities re: quote data, news, reduced transaction costs, it seems that the software tools available were lacking in anything which could give an accurate probabilistic risk assessment.

The sudden growth in popularity can further be attributed to the curious fact that gambling is illegal in all but two US states - many Americans are thus attracted to the markets as a substitute for the normal practice of the occasional punt, but would be deterred from stock trading by the intricacy of it all; becoming a daytrader would seem to be an excellent way to satisfy such a need.

Actual statistics about the success of daytraders as a whole are quite hard to come by (- for obvious reasons), anecdotally it is reckoned about 10% make a profit, and perhaps only a small fraction of that make big money.

During the popular phase of daytrading, a lot of professional traders blamed the daytraders for causing unusual fluctuations and volatility in the markets, despite that from a classical economics perspective, the greater number of traders should have resulted in the markets becoming more efficient - bringing great social benefits to us all; so much for classical economics - no one knows how the markets really work and most professionals would agree that the free market orthodoxy is just a politically-useful fiction.

Dead Cat Bounce

A traders' witticism - 'Even a Dead Cat bounces!' Used to refer to weak and ineffectual 'recoveries' which can occur during a market slump.

Dealing Rooms

Where all the trading takes place. Often conducted in heightened, near hysterical sense of emotion. Probably the worst place in the world to try and keep a cool head.

Debt

A perfect instrument of control.

When you owe someone money, then they are calling the shots - they are telling you what to do; what applies to people also applies to companies and entire countries.

Debt is an easy way to make money - you lend some out, then you charge as much interest as you can get away with; the greatest yield is to be obtained when the debtor is paying off the loan very slowly, without actually defaulting.

Debt to Equity Ratio

Bonds plus preferred stock divided by the common stock.

Deflation

The opposite to inflation; with inflation, as time passes goods become more expensive; deflation is the reverse.

Deflation sounds really good, doesn't it - stuff getting cheaper for a change?! But not really, at least to some eyes - in recent times it has become the new worry of the professional economists and central bankers (- in the good old days they spent their time fighting high inflation); the trouble with deflation is that because goods are becoming cheaper all the time, people postpone their purchase decisions as long as possible, until they 'really need to', or perhaps in the end, not buying at all. The dangerous phrase here is 'really need to' as most of what we buy, we don't actually need, and so the overall effect of deflation is to take a lot of non-essential consumption out of the economy, which could be disastrous if e.g. it is massive consumer spending on 'crap-we-don't-really-need' that is all that is stopping the markets from entering free-fall; reduced sales means smaller profits, which means plunging share prices, which damages the economy even further - job losses, dwindling pension funds, unemployment, higher welfare spending, more government borrowing, and etc. Oh dear me.

A related phenomenon is the so-called paradox of thrift of Keynes; saving is good for an individual, and a high level of debt is bad, obviously; but, if everyone saves and spends very little, the whole economy suffers, which is bad for everyone, and most paradoxically, if every spends massively, getting themselves into debt and individual dire straits, it is good for the economy (- as long as the debtors don't lose their jobs.) So, doing the right thing for me, is good for me, but if everyone follows my example, to do what is good for them, then it is, in fact, bad for us all. Local, microscopically good acts, can result in globally, system-wide, bad consequences. Confusing, eh?

If you found the last paragraph fascinating, then a further look into Game Theory may be of interest. Game theory is about the finding of optimal strategies in situations where numerous agents are competing against each other; each agent has a number of possible actions, and for each set of actions, there is a payoff to each agent. Extend this idea to a collection of traders buying and selling on a market, and you have a model of our economy; game theory is therefore of great interest to those who would set macroeconomic policy - game theory could, in principal, provide our politicians with the means to create policies, i.e. rules of the game, which would be - overall - the best outcome for everyone.

Delayed Quotes

Quotes that are around 15 minutes late; usually freely available over the Internet.

Real-time data is almost always subscription-only alas, and its cost varies depending on what you want to trade. The lack of cheap real-time data is one of the handicaps the small investor must face - if he wants 'in the game' he has to pay a subscription, and so he is down before he makes a trade (- subscription costs being relatively more expensive for him than market professionals) and if he intends to rely on delayed data he may find that when he attempts to trade actively he is getting in and out slower than the rest of the market.

Delta

The delta is the amount by which the price of an option changes for every unit move in the underlying security.

Depreciation

Accountancy term - means the loss of value in an asset over time. Your car, for example, depreciates rather quickly in value.

Derivative

A financial entity which derives its own value from the value of some other, underlying, entity.

The main types are options, futures and swaps, but the possibilities are endless.

Directors

The top level management of a company. What these people say and do is naturally very important to a company's success.

Dispute in Law

A contention between the claims of one thief over another.

Disasters

See nightmares.

Diversification

The main element of modern portfolio theory - a fancy way of saying 'don't put all you eggs in one basket'.

The problem with the idea of diversification is that it works when you do not need it to and can fail on the occasions you really need it; for example, market conditions can occur when all stocks go down together.

Dividend

A yearly payment made to the shareholders.

Dividend Yield

Annual dividends per share divided by price per share.

Dollar-Cost Averaging

Investing fixed sums in stocks at regular intervals; helps minimize market risks, allegedly.

Domain of Validity

The conditions under which some theory works well.

All theories are incomplete and when pushed to their limits, break down. What applies to pure science can also be said about human behaviour. While all theories tend to come with a list of assumptions under which the theory will work - and scientists understand this, naturally adopting a careful approach to their pronouncements, with the general public there is a tendency to forget about any of these assumptions, and just jump to conclusions. Other common defects of reasoning include - assumptions of linearity, inferring from an incomplete data-set, or extrapolation from a poor sample.

Drawing-up-a-Contract

A swindle in progress.