StockWave Financial Glossary H

Glossary H

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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H

Hedging

Attempting to minimise, or lay-off risk.

Hedge Fund

An offshore investment fund; a more appropriate name for these vehicles would probably be Leverage Funds - but then no one would go anywhere near them, so 'hedge fund' it is then.

There are a large variety of these, specializing in very secret techniques, their characteristic claim being that they can make money even on a generally falling market. To do this they have to be able to short-sell stocks, which makes them very unpopular with certain sections of the investment community; although they serve as a convenient scapegoat their overall effect on the markets is only very small.

Once only for the very rich, but becoming more accessible to the general public; so, should you invest in one? Difficult to say - you are still giving your money to fund managers to gamble with on your behalf, the only difference being that they can now bet on the market dropping as well rising. The question is then can the fund managers spot losers (- to short-sell) any better than they can spot winners? The jury is still out on that one ...

If you do take the plunge be warned that administration charges are likely to be very high indeed, even by the standards of conventional funds, likely including a percentage of the profits; just what techniques they are using, is likely to be a closely guarded secret - you will never know what they are actually up to, and while you may think they are a team of PhDs with a bank of supercomputers, it could in fact be something like Elliott Wave, astrology, tarot cards, or ouija boards they are using. I'm not joking!

Hedge funds are in the news currently because the market is in a slump, and no one is buying conventional funds; hedge funds are seen by the fund managers as a way to get people back into the market, hence the general pressure for the FSA to approve them for general public consumption - 'consultations' are currently being undertaken. Watch out for the inevitable to appear 'Basket-of-Hedge-Funds' ISA. The very fact that what were seen as irredeemably risk vehicles 3 years ago are now on the verge of being approved for the hoi polloi shows how desperate the industry must be.

Herd Behaviour

See dealing rooms. See emotional cycle.

Birds flocking together. Lemmings jumping over a cliff. Sardines gathering in vast shoals prior to being swallowed by a passing whale.

In general, "just doing what everyone else is doing", may seem harmless and safe, but it is often the precursor to disaster; jumping on to bandwagons just as they are about to crash is not a good idea.

Alas, the lessons of history show conclusively that ... no one ever learns the lessons of history.

Horse Racing, and other common forms of Gambling

An unusual topic for a Financial Glossary!

Elsewhere, we have made the point that there is no real difference between gambling and active trading (- some people get very hot under the collar when you make the comparison), and that the investor should really start to think more like an active trader. There is also the point that in difficult market conditions, the best kinds of trades - i.e. the ones where you actually stand some chance of making money - are derivatives and bets (- spread bets that is), but this section is more directed towards the conventional gambler and why he should consider using the financial markets as an alternative to conventional betting on sporting events.

Let us consider the various common types of gambling -

Horse Racing - is just ... bent; not only is it bent, it has never been straight - it is as crooked as hell. Jockeys are often told where to finish by their owners who are trying to manipulate the odds; the only time you get a clean race is when all the runners are simultaneously on the fiddle - then no one knows who will win. Even the advent of new technology in setting odds - similar to that used in financial markets, I might add - is probably leading to even more abuses.
Casinos - the House always has the odds in its favour; Blackjack is the only game where the punter has a reasonable chance. You can only get the odds in your favour if you learn to count cards (- and what's wrong with that, since it turns a game of chance into one of skill?) but they will bar you for this. If you don't count cards but simply win too much, they will bar you as well! No one is supposed to win in casinos except the House, therefore if someone is winning, then they must be doing something illegal. Casinos are friendly places as long as you are content to lose.
Popular Sports - e.g. Football; apart from a handful of cases, there is no real reason to believe that footballers throw games, so it is probably pretty straight, at least at the top level - if you are playing in, say, the European Cup Final, then there is no way any footballer would throw it for money - no amount would be worth it; when there are big prizes at stake, everyone is trying. But with popular sports, the bookmakers will be on top of things concerning the quoting of odds; with unpopular sports, it could be that your knowledge is superior to the bookie, but these contests are even more likely to be compromised. In general, anywhere where there is weak regulation and massive gambling interest, is a good place to avoid, especially so if organized crime is lurking.

Bookmakers - who fulfill the function of both broker and market maker where gambling is concerned often do not give very good odds, i.e. their spreads are very large. Sometimes they just won't pay out. Often accuse legitimate gamblers of being involved in 'betting scams' simply because they win too often. Always moaning about how much money they are losing.

With betting on the financial markets, while market manipulation, insider trading, etc, is still possible, it is much harder to do due to the amounts of money involved (- e.g. a stable lad with a syringe can't do it! ); fiddling the FTSE or the DOW is very, very hard! Brokerage is very competitive, and it is all done electronically - you should be able to get small spreads on whatever it is you want to trade (- as long as you are not buying stock), and you are not trying to trade something e.g. on the AIM/OFEX, where liquidity can be a problem.

House of Cards

A fragile structure, prone to collapse when put under the slightest pressure. An apparently respectable financial structure may, in fact, be a house of cards.

Human Behaviour

Whatever happens, people need to eat food, drink water and have a place to live. Once they have these, they will go looking for sex or some form of intoxication or other diversion. Disputes arising from the pursuit of these basic drives will lead to various forms of violence, hence the need for weapons, armed thugs (- policemen, soldiers, nerve gas, nukes, aircraft carriers ...), the apparatus of social control (- mass media, politics, religion or other belief systems, prisons, schools, pharmaceuticals ...), and bureaucrats to administer it all (- officials, commissars, lawyers, judges, councillors, priests, mullahs, rabbis, Whitehall mandarins ...) At the top of this pyramidal hierarchy will lie a self-serving elite who either claim -

their actions are in the 'national interest' rather than any self-interest
their actions have little or no effect or influence on society as a whole, or
they do not actually exist as a coherent body.

Note that this template fits all societies of whatever description; given that this has not changed for several millenia, it is likely to stay true in the future - so if you want to buy some stocks for the long term, then this is what you should be thinking about - stay away from novelty.

Hypothesis

A mathematical term; in practice it means either something that is obviously true, but cannot easily be proved, or more seriously, an outrageous guess or simplification, most often assumed in order to allow the formulation of a neat solution, to some problem which is in no way neat.

'Probably not true in practice' - would be an accurate description. An even more severe variant is the 'working hypothesis' - this is something which even its proposer accepts to be bullshit.