Clip and save: Confusing financial jargon can be fun

“Tariff turmoil has created a spike in the VIX. QQQ tanked to new lows. The shorts are dancing in the aisles while call buyers are toast.”

 

The statement above is an illustration of the daily tidbits I am bombarded with reading, watching, or listening to financial news media outlets. I hear or read such commentary and predictions spun by Wall Street wizards. But I must confess, I understand only a fraction of the financial jargon these pundits proffer.

 

My lovely wife, Grace, says I should turn off the TV, log off the computer, and go do something less stressful and more productive – like trimming the wild raspberry vines growing in our holly bushes. 

 

Yet, my IRA has gone down, and my IRE has gone up. So, I spent last weekend reading up on Wall Street lingo. It was too sunny, anyway, to trim raspberry vines out of the hollies. The following is offered to help any of you novices, like moi, better grapple with the financial news shoptalk spewed 24/7.

 

Treasury Bonds and Notes – These are financial instruments offered by the United States Government. They are considered safe assets during uncertain financial times. Why so safe? Because our government is just a mere $36 trillion in debt and annually spends only a couple trillion more than it takes in. Think of it like loaning money to your deadbeat half-cousin, Dwayne, who has a gambling problem and has fried his debit card.

 

The Fed – This is The Federal Reserve, the central bank of the United States. Their goal is to encourage high employment, economic growth, and reasonable inflation through monetary actions such as control over interest rates. Think of it as your rich granddad who could help you out if you were in a financial bind but probably won’t until you default on a loan or two.

 

Transitory – This is The Fed’s view of a financial metric if they believe it will correct itself within a reasonably short period of time. Think of it as Granddad saying he is darn-tooting sure Dwayne will get back on his feet any day now.

 

Quantitative Easing (QE) – QE is when The Fed purchases the debt of the government or other institutions to provide them more liquidity and to encourage lending and investment. Think of it as Granddad taking over the $2,000 bill for the hot tub Dwayne installed behind his trailer.

 

VIX – It may look like some Roman numeral, but it is more arcane than that. It is the Cboe Volatility Index, representing the stock market’s expectations of a near-term (like soon, brother) change in the S&P 500 (500 leading stocks) Index. When the VIX is low, people are more confident of future financial stability. On the other hand, when the VIX rises, people are less confident. Think of it as how confident you are that Granddad is going to get repaid by Dwayne on that hot tub deal.

 

Hedge – A hedge is a financial strategy used to reduce or offset risk in an investment by taking a position that will move in the opposite direction of the original investment. Options, discussed next, are a tool for doing this. Think of it as Granddad asking if you’d like to pay him $800 for one-half of the $2,000 IOU he has from Dwayne.

 

Liquidity – Is an estimation of how readily an asset can be converted to cash at a price that reflects its intrinsic value. Think of it as how much your buddy would pay you for the $1,000 IOU from Dwayne that you just bought from your granddad.

 

Calls and Puts, Long and Short, Covered and Uncovered, etc. – These are just a few of the terms used in the exotic, complex, and risky arena of options trading. A call is an option contract where a buyer pays a fee for the right to purchase a stock at a fixed price at a fixed future date.

 

A put is the opposite – a contract where a party has the right to sell a stock at a fixed price at a fixed future date. Obviously, each of these contracts has a financial party on the other side.

 

Sound complicated? You bet, as in executing a protective collar, long strangle, or short-covered call to mention just a few options, twists, and turns.

 

Think of it this way. If Dwayne called and offered you 100 bucks if you’d lend him $1,000 to put interior twinkle lights in his SUV, and he’d pay you the $1,000 back in 30 days when he gets that big insurance settlement, would you do it? Or would it not be long before you lost your shorts if you did? Welcome to the world of options.

 

Leverage – Is using debt to amplify returns from an investment or project. Think of it as what Dwayne is doing in trying to get y’all to front the money for him to get them twinkle lights.

 

Long Squeeze – Now, I bet you readers are about to say, “I’m with you now, Dalton. This is where I’d be if I had loaned Dwayne that one large for the twinkle lights, right?” If so, give yourself an A in finance.

 

However, financial markets are always fluid and never fully predictable. There could be a Black Swan, or improbable, event such as Dwayne actually getting that big insurance settlement. So, stay alert and informed. 

 

Remember, stocks take the stairs up and the elevator down. Don’t buy the dead cat bounce. Never catch a falling knife. Sell in May and go away and wait for the Santa Claus rally. That’s all I got for now. Grace is calling, and I gotta go prune those pesky raspberry vines out of the hollies.