October 28, 2016

The Top 10 spookiest investment terms

In a world of spooky investment jargon, VCs look out for Cockroaches, property buyers arrange Death Pledges and economies around the world seek to avoid the threat of Zombie Companies. The way we describe the activities of our financial markets and the companies operating within them is oddly sinister. . .

1. Cockroach

A creepy crawly, with an alternate meaning worth the attention of any growing business. Cockroach is scuttling in to challenge the term Unicorn as the definitive word for a startup that reaches a valuation of a billion or more. It’s a term used in the context of tech and FinTech and underpins a VC investment strategy for investing in billion dollar startups focused on resiliency. Whilst a Unicorn achieves meteoric almost magical growth, the Cockroach achieves slow, steady, sustainable growth.

2. Corporate Cannibalism

A corporate cannibal is a company, which brings a new product into a market where it already has an established product offering. It effectively starts competing with itself, causing sales of the incumbent product to decline. The aim is often to create a product, which sells better, or to increase market share and put competitors at a disadvantage.

For example, Apple releases of new mobile phones, tablets and laptop computers occur while the existing lineup still sells well. This is usually planned in order to beat competitors and create sustained interest in its products

3. Graveyard Markets

A graveyard market is a severe bear market (where share prices are falling, encouraging selling), which investors are staying away from because of fears of further declines.
As Investopedia puts it, in a graveyard market “the dead (longtime investors) can’t get out, and the living (new investors) aren’t rushing to get in.”

4. Mortgage: Death Pledge

In Latin, mortgage means death pledge. Historically, when the oldest son of a nobleman needed large sums of money which his father refused to give him, he often turned to borrowing. In arranging the loan, he would gage or “pledge” to repay the debt when his father died (at which time the son expected to receive his inheritance).

5. Phantom Stock and Ghosting

Ghosting is an illegal practice whereby two or more market makers collaborate to manipulate stock prices. Although market makers are bound by law to remain in competition, this collusion can be nearly invisible – like a ghost – making it tough for investors to spot.

Phantom stock is not such a negative thing; it’s simply stock that doesn’t exist. With this imaginary stock, companies offer employees (usually senior management) the benefits of owning stock without taking any from the outstanding shares. The phantom stock follows the price movements of the real company stock, paying out any profits that are made. This is a clever way for companies to motivate management without giving up equity.

6. Tombstones

Ironically, the tombstone we find in the financial world is created at the beginning of a stock’s life. It is a written advertisement issued by investment bankers before the public offering of a security. Printed in heavy black ink and surrounded by a black border, the tombstone gives basic details about the issue and lists – in order of importance – the underwriting groups involved in the deal.

7. The Witching Hours

In medieval times, the witching hour was believed to be a time of magic when witches took to the skies and abducted children foolish enough to wander out after dark. In the financial markets, the witching hour refers to the last hour of stock trading between 3pm (when the bond market closes) and 4pm EST (when the stock market closes) and can be characterized by higher-than-average volatility; traders will often be scrambling to offset their options and futures positions during this time.

8. Freaky Friday

The triple witching hour occurs when three classes of options or futures expire on the same day:

  • Stock market index futures
  • Stock market index options
  • Stock options

This happens on a day known as “Freaky Friday”: the third Friday of March, June, September and December.

9. Voodoo Accounting

Voodoo accounting occurs when a company uses suspicious accounting methods to disguise what is going on with the business. These methods might involve maths where numbers don’t add up or more a complex ‘cooking of the books’. Corporate zombies often use voodoo accounting to cover up their major financial woes.

10. Zombie Companies

Like a reanimated corpse, Zombies are companies that are insolvent or on the brink of insolvency, still operating as if nothing’s wrong. Zombie bank, was a term first used by Edward Kane in 1987 in the context of the Japanese crisis in 1993, to explain the dangers of tolerating a large number of insolvent savings and loan associations.

The term has been used more recently in arguments on the subject of government bank bailouts. Many economists argue that the Japanese crisis illustrates how “a banking system populated by zombie banks is a major threat to recovery; banking systems remain dysfunctional until losses are fully recognised and disclosed; and procrastination increases the ultimate cost to the taxpayer.” [Source]