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HSL Glossary

Here’s a gift from all of us at HSL; a gift that (we hope) will not only last a lifetime, but give you keys to many financial & geopolitical doors. These days there are so many new investment vehicles, terms & techniques that it stretches your vocabulary to keep up. Even professional traders have to run to stay current. Also, memories fade & we forget some terms & tactics that we used to know. This 8-page HSL Functionary can be at your side forever, for quick reference to remind yourself of a forgotten term, or expand your knowledge into new territory. It will also build your confidence. We’ll probably upgrade/update it every year or two. This Functionary compilation was a team effort of HSL’s star players: Dr. Bruce Roman, Gordon Frisch, our Cartoonist, & myself. It’s an ongoing gift from us to you. We hope you enjoy it. ....H.D.S.

— A —

A/D-line: See Advance/Decline Line.

Add: To increase a position by either purchasing additional shares/units, also called “buying more,” or by selling additional shares/units (if short), also called “selling more.”

ADR: See American Depository Receipt.

Advance/Decline Line: Abbreviation: A/D-line. A line made from the difference between the number of stocks that went up & the number of stocks that went down for each trading day. Stocks that are unchanged are not counted. Eg, if 1300 stocks go up & 1000 stocks go down, the difference is +300. The 300 is added to the total from the previous day. Also called breadth (of the market). The A/D-line shows what the great mass of stocks are doing in contrast to the limited number of stocks contained in any stock index, particularly the Dow. It’s especially noteworthy when it diverges from the stock averages. Eg, the Dow is making new highs while the A/D-line is falling, showing that while a few stocks may be “leading the market” the majority of the market aren’t following. This would make the new Dow highs suspect & increase the odds a reversal is coming. Conversely, it’s bullish if the A/D-line makes a new high along with the Dow, “confirming” new Dow highs.

American Depository Receipt: Abbreviation: ADR. Instruments issued by American banks as counterparts for non-US securities. In practice, same as shares of a corporation, except that the ADR is traded on a US exchange, not the exchange of the country in which the corporation is domiciled.

Ask: The price someone is willing to sell at. See Bid/Ask spread.

At-the-Market: To buy/sell “at the market.” See Market order.

At-the-Money: An option that has a strike price the same or very close to the market value of the underlying security. See also Intrinsic Value.

Automatic Reinvestment: Automatic reinvestment of shareholder dividends in a corporation’s stock. The corporation usually does this without brokerage fees & may even offer a small discount from the current price.

Average Down: To buy more at a lower price than the original purchase. Eg, if you bought L’Oréal shares at 1015 & later purchased more at 950, you “averaged down.” Not recommended unless an experienced investor. But a tactic that can turn a loss into gain, especially if adept at discerning chart support & resistance levels.

Average Up: 1) To sell more at a higher price than the original purchase. Eg, you sold short Micron Tech at 70. If you sell more at 80, you “averaged up.” Not recommended unless an experienced investor. But a tactic that can turn a loss into gain, especially if adept at discerning chart support & resistance levels; 2) Infrequently used to describe additional buying at higher prices.

— B —

Basis Point: 1) .01% of yield in a fixed-income security. If the T-Bond yield drops from 7.05% to 6.40%, it’s declined 65 basis points; 2) Used in referring to changes in price in other than fixed-income securities. Eg, if Yen futures drop from 98.10 to 95.50, the drop can be described as 260 basis points.

Bearish: Having the opinion a market is going to go down.

Bearish Divergence: Most commonly, a new high in price without a corresponding new high in a related price, average, index or other technical indicator. Eg, if a stock makes a new high, but a technical indicator such as RSI doesn’t, it points to a loss of upward momentum & possible correction or change in trend. See also Bullish Divergence, Divergence & RSI.

Beta: A measure of a stock’s volatility in comparison to the S&P 500 index. The S&P 500 index is given a value of 1. If a stock is more volatile than the S&P 500 index, it will have a beta greater than 1. If less volatile, the beta will be less than 1. Eg, if the S&P 500 index moves 5%, a stock that usually moves 7.5% will have a beta of 1.50, indicating that it’s 1.5x as volatile as the S&P 500 index. If the stock usually moves 2%, it would have a beta of .40. Betas are useful in constructing portfolios of greater or lesser volatility than the S&P 500 index.

Bid: The price someone is willing to pay. See Bid/Ask spread.

Bid/Ask spread: The difference in price at which you can buy & sell. Eg, if IBM has a bid/ask spread of “159 at 159 1/4,” you’d pay 159 1/4 if buying & receive 159 if selling. The Bid/Ask spread is not unique to financial markets. If you were to purchase a numismatic coin from a coin dealer, you’d pay the Ask price. If you wanted to sell the same coin to the dealer, you’d receive the Bid price. The Bid/Ask spread is the price of doing business in any market in which you are not in the business yourself. Also called Bid/Offer spread. Bid/Offer spread: See Bid/Ask spread.

Big Board: New York Stock Exchange.

Big Brother (BB): From the character in George Orwell’s novel, 1984, symbolising an omnipresent, seemingly benevolent figure, but in reality exerting oppressive control over individual lives by an authoritarian govt. Big Brother can be a govt, a person, an employer, or a faceless computer database containing all the private bits & pieces of individuals’ lives, with impersonal & uncontrollable power to dictate their fates, directly or indirectly.

BIS: Bank for International Settlements, Basel, Switzerland. The granddaddy of all banks—central bank for all of world’s central banks.

Blue Chip: A term of American origin, at first designating a chip off a blue stone—a diamond. The term was also adopted for high-value poker chips. It’s used to describe shares of 1st-class corporations—those which are large & have a very good record of earnings & paying dividends. They’re usually old & extremely well established. However, their prices go down as well as up, so chart analysis is vital before buying/selling.

BOJ: Bank of Japan (Japan’s central bank).

Bond: A long-term debt instrument issued by a govt or corporation. The term in years of various bonds can & does vary, but is usually 10 years or longer. Debt instruments with a shorter term than 10 years but over 1 year are usually referred to as Notes.

Breadth: See Advance/Decline Line.

Bullish: Having the opinion a market is going to go up.

Bullish Consensus: Generically, a survey & compilation of the percentage of advisors bullish or bearish on a particular market. A number of companies do these surveys on a daily & weekly basis. Investor’s Intelligence is a widely followed stock market consenus. Market Vane’s Bullish Consensus is widely followed in the futures markets. See also Contrary Opinion.

Bullish Divergence: Most commonly, a new low in price without a corresponding new low in a related price, average, index or other technical indicator. Eg, if a stock makes a new high, but a technical indicator such as Stochastics doesn’t, it points to a loss of downward momentum & possible correction or change in trend. See also Bearish Divergence & Divergence.

Buy Back: See Cover.

Buy More: See Add.

Buy-Stop: See Stop order.

— C —

Call (Option): 1) A type of option. A call option gives the buyer the right but not the obligation to buy a stated number of shares of a security at a stated price on or before a specified date. (Also used for bonds & futures contracts). Eg, a Dec 85 Eastman Kodak call option gives the owner the right to buy 100 shares of EK on or before the December expiration date of the option (usually the 3rd Friday of the month) at 85 regardless of the actual price of EK at the time. More frequently, if the option is “in-the-money,” ie, the stock is above the 85 strike price, the owner will simply sell the option & collect the profit. If EK is below 85 & the option expires, the call buyer loses all of the money (premium) paid for the option. The advantage of buying options is leverage. For several hundred dollars you have the right for a limited time to participate in the advance of a stock, which, as in the EK eg, would require a minimum investment of US$4250 (using 50% margin). The big disadvantage is that you not only have to be right about the direction of price movement, your timing must also be correct. Selling options is usually the wiser tactic as at least 80% of all options expire worthless—as they’re designed to do. See also Put (Option); 2) The action by which a company decides to redeem a security before its maturity date.

Cancel/Replace: Cancelling an order & replacing it with a different order for the same security or contract.

Cash Charts: Price charts reflecting the cash or “spot” price of a commodity in comparison to a forward price in the futures market.

CBOT: See Chicago Board of Trade.

Central Bank: A nation’s most powerful financial institution, usually state-owned, designed to regulate & control fiscal & monetary activities. It issues legal tender, backs reserves for the nation’s banks, controls flow of money & gold, & regulates money supply & credit. By virtue of its huge power, it greatly influences interest rates & the economy. Central Banks sometimes undertake “intervention,” which is fiscal or monetary interference in the marketplace to achieve a desired outcome; eg, pushing a currency up or down. They often claim their intention is to “thwart currency speculators,” but in truth they are thwarting the free market, blocking natural forces of supply & demand. Their intervention can be verbal (“jawboning”) or physical, wherein they use taxpayer money to change the value of the taxpayers’ money. Free market people consider such action immoral, & in the US, unconstitutional.

CFR: Council on Foreign Relations. Definitions of CFR from notable sources. Arthur Schlesinger, Jr: a “front organisation” for “the heart of the American Establishment.” Newsweek: “the foreign policy establishment of the US.” Richard Rovere in Esquire: “a sort of Presidium for that part of the Establishment that guides our destiny as a nation.” Columnist Edith Roosevelt (granddaughter of President Theodore Roosevelt): “The word ‘Establishment’ [CFR] is a general term for the power elite in int’l finance, business, the professions & govt, largely from the northeast, who wield most of the power regardless of who is in the White House. Most people are unaware of this ‘legitimate Mafia.’ Yet the power of the Establishment makes itself felt from the professor who seeks a foundation grant, to the candidate for a cabinet post or State Dept job. It affects the nation’s policies in almost every area.” Foreign Affairs magazine is the CFR mouthpiece, & called by Time, “the most influential periodical in print.” It’s been said, if you want to know what the US govt will be doing tomorrow, read Foreign Affairs today.

Chart Analysis: See Technical Analysis.

Chicago Board of Trade: US futures exchange on which financial instruments (T-Bonds, T-Notes, Municipal bonds) & the Grain Complex (corn, oats, soybeans, etc.) is traded.

Chicago Mercantile Exchange: Abbreviation: CME. US futures exchange on which the S&P 500 index, cattle & pork bellies are traded. A division of the CME, the International Money Market (IMM), trades currency futures & the eurodollar.

CIS: Commonwealth of Independent States. A federation of self-governing states made up of Russia & most of the former USSR republics, for the purpose of coordinating affairs.

Closed-End (Mutual) Fund: An investment company which manages a mutual fund with a limited number of shares. Listed on an exchange, it is very similar to a stock, in that you can place buy & sell orders, stop-loss orders, limit orders, etc.

COMEX: See Commodity Exchange Inc.

Commodities: See Futures.

Commodity Exchange Inc: US futures exchange on which copper, gold & silver are traded.

Common Stock: A security representing an ownership interest in a corporation. Common stockholders have claims on assets after claims of bondholders, other creditors & preferred stockholders. Common stockholders control management & company policy via voting rights.

Commonwealth: An association of 51 self-governing independent nations & various dependencies (colonies & protectorates) having in common that they were all parts of the old British Empire. The British monarch is the symbolic head & prime ministers & finance ministers meet periodically. Members consult & try to coordinate policies on economic, scientific, educational, financial, legal, & military matters.

Confirm: To validate or increase the validity of a particular market movement, usually a new or significant high or low. Eg, if the Dow makes a new high but the Dow Jones Transports doesn’t, the new high is not “confirmed.” Can also use it with other market indices, eg, A/D-line. More generally, confirmation has to do with comparing a number of technical indicators or studies to see if most are in agreement as to future price movement. See also Divergence & Dow Theory.

Contingency order: An order that depends/is contingent upon some other parameter occurring first, usually the execution of another order. Eg, “If I’m filled on my order to buy 400 shares of Roche Holdings, place an order to sell 400 shares at 8550-stop.” Brokers are not required to accept contingency orders. If you are a valued client (translation: your business generates good commissions for the broker), s/he will accept the contingency order but only on a “not-held” basis.

Contrary Opinion: A market theory based on the concept that the “crowd” is usually wrong. A contrary opinion is a minority opinion (& a small minority at that) which is the opposite of what most people think will occur. Eg, if “everyone” is bullish on bonds, the “contrarian” turns bearish. See also Bullish Consensus.

Convertible Bond: A bond that can be converted into common shares at a price or rate specified upon issuance of the bond.

Correction: Any temporary reversal or retracement in price movement in the opposite direction of the price movement that just occurred. Normally used when referring to a price movement not in the direction of the primary trend. A correction can develop into a change in the trend, but this can only be determined retrospectively.

Cover: The action of buying after initially selling (shorting). Eg, “Cover my AT&T short at 34” instructs broker to buy the same number of AT&T shares you initially sold, when the price of AT&T reaches 34.

— D —

Daily Charts: Charts which plot the high, low & closing price of each day’s trading activity. See also Line & Bar.

Day order: All orders are considered “day” orders unless specifically stated otherwise. Day orders are good for that trading session only & expire at the end of the trading session.

Deflation: An actual decrease in prices. The opposite of inflation, which is an increase in prices.

Disinflation: A decrease in the rate of inflation. Eg, inflation is 4% one year & 3% the next year.

Divergence: Failure of the price movement of one security, average, index or technical indicator to confirm the price movement of another security, average, index or technical indicator. See also Confirm.

Diversification: The reduction of risk by investing in non-related securities & different types of investments. Broad categories of investment would include stocks, bonds, CDs, money market accounts, currencies, precious metals, futures, real estate & collectibles (art, coins, stamps, etc). Diversification is necessary because there are no sure things in investing. Risk-spreading ensures that if one area goes sour, one may still be doing well in another. In fact, a properly diversified portfolio is designed so that occurs.

Dividend: Payments made by corporations to their shareholders in cash or stock.

DJIA: See Dow Jones Industrial Average.

Dow: See Dow Jones Industrial Average.

Dow Jones Industrial Average: Abbreviation: DJIA; Dow. A market average of 30 widely held NYSE-listed stocks. Average is not weighted for capitalisation of the stocks. It is computed by taking the sum of the prices of the 30 stocks & dividing by an adjusted denominator. As the denominator gets smaller, the volatility in the Dow increases. The DJIA is the world’s most widely followed & quoted stock market index.

Dow Jones Transportation Average: Often referred to as Dow Transports or simply Transports. Originally the Rail Average, the DJTA is comprised of 20 stocks consisting of airlines, freight, railroads, etc.

Dow Theory: Theory that a major trend in the stock market must be “confirmed” by both the Dow Jones Industrial Average & the Dow Jones Transportation Average (formerly the Rail Average). If one of the averages makes a new high or low, that new high or low is suspect until the other average also makes a new high or low, thus “confirming” the new high or low. Originally conceived by Charles H. Dow as an indicator of business rather than the stock market. Robert Rhea subsequently developed the theory further. It is not as simple a theory as the above short definition might indicate & is often misquoted & misunderstood. See Confirm.

— E —

Earnings Per Share: Abbreviation: EPS. Corporation’s net income after taxes & payments to preferred shareholders divided by the number of outstanding shares of stock. See also Price-Earnings Ratio.

ECU: European Currency Unit, forerunner of the Euro. See Euro.

EFTA: European Free Trade Association, closely linked to EU, but whose members are non-EU. Members include Iceland, Liechtenstein, Norway & Switzerland.

Emerging Markets: Markets in countries that are not well established economically/financially, but are making progress in that direction. Eg, China, Thailand.

EMS: European Monetary System. Arrangement linking individual currencies of EU nations to stabilise foreign exchange & counter inflation via formulas called ERM (Exchange Rate Mechanism).

ERM: see EMS.

EU: European Union. Unwieldy, socialist, mega-govt institution which ordains common market, common currency, common foreign & security policy, common defence policy, cooperation on justice & home affairs, & creation of EU central bank. Includes 15 European nations: Austria, Belgium, Britain, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain & Sweden.

Euro: EU’s single currency unit set for 1999 launch, in theory, to eventually replace all individual EU currencies.

Eurodollar: US dollars on deposit at European banks.

Ex-Dividend Date: The date on or after which a buyer will not receive the next dividend. In US, currently 2 days before the record date. When a stock trades “ex-dividend,” it means on that day a dividend was paid on the share & this amount is deducted from the share price. Charts sometimes have an “X” marked on them to denote such days. The relationship between the ex-dividend date & Record Date depends upon the number of days required to “settle” a transaction. See also Record Date.

— F —

Fill: The price at which you bought or sold. Eg, “Mr. Jones, your fill was 117 on 5 June T-Bonds.” Verb form “filled” means the order was executed/completed. “Mr. Jones, your T-Bond order was filled.”

Flat: Having no position long or short. Eg, “I’m flat Corn.”

Fundamental Analysis: One of the two broad categories of market analysis (other is technical) used to obtain indications of future price movements. It is a quantitative approach based upon a company’s balance sheet, profit & loss statement, industry trends, economic & managerial data, supply & demand, etc. The problem with using only fundamental analysis is that you never know what you don’t know about a company, which may be pivotal in buy/sell decisions. Also, deciding how much weight to give each piece of data is highly arbitrary. Lastly, fundamental analysis doesn’t tell you when to buy/sell. Your analysis can be correct, but the “market” may not recognise the “opportunity” for years. See also Technical Analysis.

Futures: A contract which contains an agreement to buy or sell a specific amount of a commodity (eg, corn, crude oil, gold) or a financial instrument (eg, Treasury Bond, S&P 500, Eurodollar) at a particular price on a stipulated date. It obligates the buyer to purchase & the seller to sell, unless the contract is offset before settlement date (which is 97% of the time). Sometimes called “commodities.” But with the introduction of financial futures in addition to physical commodities, futures is the preferred term.

— G —

G-7 (Group of Seven): Elite club of 7 major industrial democracies who meet periodically to discuss world economies & other issues. Members are Canada, France, Germany, Italy, Japan, UK & US.

Gap: A span in price between the high of the previous trading session, & the low of the subsequent trading session or between the low of the previous trading session & the high of the subsequent trading session in which no trades occurred.

Gap Opening: An opening price that is either above the high or below the low of the previous trading session.

Gilts: Securities of corporations that have shown over time their ability to pay continuous dividends or interest. Most commonly used to describe bonds, as in “gilt-edged” bonds.

GNP & GDP: Gross National Product & Gross Domestic Product. GNP is the total worldwide market value of all goods & services produced by a nation during a specified period (usually a year). GDP is similar, but reported quarterly & covers only goods & services produced inside a nation’s borders. In this era of multi-nat’l corporations, GDP is considered the more accurate barometer of a nation’s economic performance.

Gold Standard: A monetary standard under which a paper currency unit is equal in value to & exchangeable for a specified amount of gold. Its purpose is to put a limit on govt deficit spending & to give citizens a currency that maintains its value & has global acceptance. It blocks inflation. Politicians dislike it as it makes them balance their budget & puts power in the hands of the people. The US Constitution demands gold & silver backing for the US dollar, but politicians found ways to bypass the Constitution.

GTC order: Good-Till-Cancelled order. See Open order.

Continued

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