Backwardation
When share markets are moving very rapidly, such as in the 1987 stock market crash (where prices were falling so quickly that it was known as a fast market), sometimes there are inefficiencies in the way shares are priced. One market-maker (a professional trader who buys and sells shares for his firm’s ‘topic’) might be selling Bloggins shares at £1.90, and another market-maker might be buying the same shares at £2.00. An astute trader called an arbitrageur (see Arbitrage) can exploit this price anomaly in the shares, called a ‘backwardation’, because market-makers are obliged to deal in the shares they make a market in. Oh no, you say, in your kind, caring and sharing mode, that means someone might lose a fortune. Relax. The market-maker is only obliged to deal in a certain parcel size of shares, and he will soon adjust his prices to compensate for his previous error. Or, if things are really looking hairy, the market-maker might just choose not to answer the various phones ringing with dealers clamouring to dump their stock on to him!
Balance of Payments
Every year, the money that goes in and out of the ‘bank account’ of a country creates a surplus or a deficit. Either way, whether a country is in the black or in the red, the amount of money that is flowing in and out of its ‘bank account’ is called the balance of payments. In precise economic-speak – the balance of payments records the flow of international transactions of a country over a period of time, comparing inflows and outflows.
Balance Sheet
A snapshot of a company’s assets and liabilities on the day the company’s financial year ends. It shows you the things the business owns versus its debts.
Bank of England
Nearly every country has a central bank that is responsible for printing those pretty little banknotes that we so eagerly enjoy spending. The Bank of England is ours. Dubbed ‘The Old Lady of Threadneedle Street’ by the City, she (for naturally anyone who controls the country’s purse-strings must be a she!) is also in charge of borrowing cash from outsiders in the form of government bonds, otherwise known as gilts. These pay a fixed rate of return over their lifetime. The Bank of England keeps a watchful eye on the performance of all the banks registered in the United Kingdom, as well as licensing banks for business. This includes foreign banks that want to operate in the United Kingdom. It also sets our interest rates, at arm’s length from the government. A group of people meets once a month to decide whether interest rates should go up, go down or stay unchanged. Called the Monetary Policy Committee (MPC for short) these bods hold our financial future in their hands. Since they decide the national cost of borrowing, it also settles how much we’ll get while our money languishes on deposit. This in turn affects business and consumer confidence, which influences the outlook for the economy. Governments don’t like it if we spend and borrow too much (a boom), and they don’t like it if we spend and borrow too little (a bust or recession). They use interest rates to try to control our financial habits, which is unfortunately a bit like trying to do brain surgery with a fish knife (see Base Rate, Boom/Bust, Central Bank, Interest Rate).
Bankrupt
Oh dear, oh dear, oh dear. You really don’t want this to happen to you. It’s when the bills pile up and up and in the end the unlucky person who’s accumulated these debts knows that there isn’t a dingo’s chance in hell that he or she can pay them. Filing for bankruptcy wipes the slate clean, in a manner of speaking, but there are negative corollaries, such as the fact that getting money on credit can be an uphill struggle in future, and when trying to borrow money, the prognosis is not good. Banks are remarkably reluctant to hand over money to people who have defaulted once before. You might find it impossible to get a mortgage in the future, be barred from being a director, or find it hard to get other jobs. Pensions, inheritance and any other assets you own are also at risk.
However, there are other, more sinister sharp dealings that go on, and not necessarily on the side of the borrower. There is a nefarious practice that goes on with some lenders of cash (naming no names for fear of being relentlessly sued!). It’s when they cheerfully lend you money because you have a very sexy asset that can act as security against the loan. It could be land, a stately pile of rocks, a valuable picture, etc. So there you are diligently toiling to pay off your debts, and wallop, the institution forecloses rather too sharpish on the loan by which I mean, they say ‘Cough up the money you owe us, or else!’ The ‘or else!’ naturally refers to handing over the valuable thing that acted as security for the loan in the first place. So think carefully before you borrow money against your cherished possessions.
Bargain
Quaint old-fashioned City word that means any transaction in a share or bond.
Base Rate
The Bank of England sets the national interest rate, called the base rate. Then all the banks and building societies immediately react (well, usually anyway) and adjust the rates of interest at which they are willing to lend us money, as well as the rates they will give us when we put the money on deposit with them (see Bank of England, Interest Rate, Prime Rate).
Basis Point
The City calls them Bips. This just means 0.01 per cent. So 100 basis points sound enormous but are in fact only 1 per cent. The need for such teensy-weensy calibrations in interest rates has arisen because such vast quantities of money are being chucked around in the form of loans, bonds, currency trades, etc, that every tiny movement in interest rates can mean the loss or gain of a huge sum of money.
Bear
The opposite of a bull, a bear is the doom and gloom merchant who shakes his head and says the stock market is going to fall. He has usually presciently sold all his shares at what he perceives to be the top of the market and watches with a certain amount of schadenfreude as the suckers who still own shares panic and sell them at any price as the market falls out of bed (see Bull).
Bearer Securities
Bits of paper that are valuable and equivalent to cash, these are virtually always bonds (see Bonds). Like cash, they belong to whoever has them in their hands at the time. In this case possession is ten-tenths of the law! Bearer securities do not have to be registered in anyone’s name, so they are nice and anonymous. Just like other bonds, they are tradable, but are becoming increasingly rare these days as it is a bit dodgy to carry around paper of such high value (see Registered Securities, Securities).
Bear Market
When everyone in the whole world is gloomy and the stock market is dominated by traders who are all really negative vibe merchants and dumping shares wholesale, followed closely by panicking investors. Bear markets tend to strike out of the blue when everyone is really optimistic and expectations are high, so when something goes wrong, it scares the heebie-jeebies out of them. They are triggered by a sudden and total loss of confidence in things on a massive scale. People get very insecure and fearful, neither spending nor borrowing money, and this has an enormous knock-on effect on the rest of the economy, plunging it into recessionary torpor. The ‘bear’ is characterized by the fact that the market falls and keeps falling over a long period of time. One day of negativity here or there is not a bear market. Even a sharp, precipitous plunge is usually described as ‘just a healthy correction’. Don’t you just love these euphemisms! No, a real bear market drags on and on and on, the sense of doom and gloom is all-pervasive and shares are definitely not flavour of the month or year for that matter. In truth, not many of us have actually seen a really hairy bear market. The last one was back in 1974, when the stock market fell to a quarter of its original value (see Bull Market).
Bear Raid
It’s not Winnie the Pooh raiding the larder for honey (although some of the traders do bear more than a passing resemblance to him, on account of the copious amounts of alcohol they consume -purely to help their investment decisions you understand). Those bad boys (and girls) of finance, speculating traders, love getting up to all sorts of spivvy activities to try to get the better of the rest of the market. Bear raiding is when these folks dump huge piles of shares in a particular company on to the market in the hope that they will panic others into selling them. These traders are very often (though not always) ‘shorting’ ie, flogging shares they don’t own. The idea behind spooking other shareholders into selling their shares is to further depress the price of the shares the traders are dumping. Why do they do this? Ah, there is method in their madness. Having frightened everyone else out of their shares the bear raiders furtively re-enter the market and start to buy up all the shares in that company at the depressed price. The shares have been sold at a higher price and bought back at a lower price, so the traders are quids in. Of course, it goes without saying that this is a risky business and these dirty tactics could easily backfire – the traders could sell shares they don’t own and the price of the shares could, horror of horrors, start going up (see Bear Squeeze).
Bear Squeeze
This is a bear raid gone wrong. When traders ‘short’ shares, ie, sell shares they don’t actually own, in the hope of buying them lower down, the trade can go against them. The shares they hoped to buy back lower down suddenly swoop up in price, wrong-footing them and leaving them nursing rather severe losses. The reason being that traders have only a limited time in which to buy back the shares they’ve sold ‘short’ before they have to deliver them to the purchaser. The longer they are caught short without the shares, the greater the risk that they will end up really paying through the nose when they finally get to buy them back. Of course their competitors whoop with delight at the thought of the bear raiders getting unstuck!
Bed and Partner
Bed and partnering is a legitimate way of reducing a capital gains tax liability (CGT) on shares. The idea is that shares you own at the end of the tax year are worth so much. By selling them on the last day of the tax year and buying them back the next day, you can use up your CGT allowance for the year to the full, and at the same time limit the future amount of gain on which you are liable for the dreaded CGT. The shares are sold in one person’s name and when they are bought back the following day, at the start of the new tax year, they are transferred into the name of the spouse. I can imagine a lot of people playing ping-pong with their shares every year in this way (see Tax – Capital Gains Tax).
Benchmark
This word is bandied around a lot in the City. Basically it’s a way of comparing one investment with another to see how they have performed relative to one another. The City types like to see whether their recommendations and investments are faring better or worse than their selected benchmarks. A well-known benchmark is the FTSE 100, which measures the stock market performance of the top 100 British companies listed on the Stock Exchange. Comparing how an investment has performed in this way, you can get an idea of whether it is outperforming or under-performing the benchmark. Obviously the thing to remember is that just as you can’t compare apples and tomatoes, so it’s pretty meaningless to compare a Japanese share’s performance with the UK FTSE 100, for instance (see Outperform, Underperform).
Best Advice
It’s the equivalent of the Hippocratic oath for doctors, only it applies to stockbrokers and all financial advisers in the investment community. Mostly they adhere to the rules, but you have to be on your guard against excessively optimistic, infuriatingly chirpy advisers who somehow omit to mention the downside in their investment advice. There is a tendency to – how shall we say -emphasize the positive and de-emphasize the negative. That puts the onus on you to ask the difficult questions. Don’t let any adviser off the hook by assuming that because they are being positive and cheerful that they must be right all the time (see Adviser, Financial Adviser, Independent Financial Adviser, Stockbroker).
Beta
The volatility of an investment compared with its market. A share that has a beta of one, for example, has the same level of volatility as its stock market. The more volatile or unstable a particular share is, the higher its beta (see Volatility).
Bid
The price at which you can sell a share on the stock market (see Offer, Spread).
Bid/Offer Spread
Big Board
You might be thinking ‘Big Bird’ in Sesame Street. No. It is the Big Board that shows the main prices of shares traded on the floor of the American Stock Exchange.
Big Picture
When you start to get interested in finance and business, (and it is addictive, I warn you), it is important to pay attention to what is going on in the big wide world out there. So it means keeping an eye on things such as where US interest rates are heading, and international events that might have a bearing or effect on your local stock market. Middle East unrest is a popular one for causing upset. Obviously it’s impossible to predict what might happen in the future as far as world markets go. We can, however, look to history to see how large-scale world events have previously affected them. The oil shock in the 1970s is a good example. It resulted in a huge rise in inflation as costs for industry rocketed, and investors lost all confidence in business as they worried about it, justifiably, I might add. You need to have a heightened awareness of what’s going on in the big picture in order to help your investment decisions.
Black Monday
The City loves to christen really ghastly stock market moments with a special name. It gives the traders something to talk about when they go for their ritual binges down the frilly wine bars, like Corney & Barrow, that have proliferated in the City since the 1980s. Black Monday is a popular one. It describes the day the Dow Jones Industrial Average fell, okay plunged vertiginously to be precise, by the biggest amount it’s ever plunged in the whole history of the stock market. I was there on Monday 19 October 1987 (ah, reminisce) with all the other die-hards and witnessed the wholesale panic and fright. The market’s fall scared the living daylights out of everybody, many of whom were convinced the end of the world was nigh and sold their shares. Of course, with the benefit of hindsight (see Jobbing Backwards), all those panic-stricken investors now jovially describe it as a healthy correction, a mere blip in the relentless upward march of the longest bull market we have experienced in the last 100 years.
Black Tuesday
Another gory day in the annals of stock market history. This one, few will remember with any vividness. It describes the Great American Stock Market Crash of 29 October 1929. (You may have already observed that October seems to be a popular month for stock market crashes!) Black Tuesday was, without doubt, the worst day for the 1930s as far as the world economy went. It precipitated the Great Depression, which was a horrible global economic slump. One relegated to the history topics (we hope!).
Black Wednesday
When Britain pulled out of the Exchange Rate Mechanism on 16 September 1992, the Chancellor of the Exchequer had already spent a cool several billon pounds trying to defend sterling against the likes of Soros and others, who had been dumping the currency in the conviction that it was overvalued within the ERM. Once sterling was on its own, it weakened a bit more. But like the phoenix rising from the ashes, it recovered, and our stock market and economy have gone from strength to strength ever since we quit. So we should really rename it White Wednesday because quitting the ERM was good news for us.
Blue Chip
In the City, it describes shares in companies that are very big, well known and perceived to be safe and solid. They are generally the companies with the largest stock market values and many companies in the FTSE 100 are referred to as blue chips. But whilst people tend to rely on these companies being stable with steadily increasing profits and doing well, there are occasional nasty surprises. Like the shock plummet in the shares of good old Marks & Spencer in the late 1990s, when it revealed a serious setback in the company’s profits and overall direction. That’s why diversification, ie, spreading your money over a wide range of investments, is so important. This reduces the impact on your overall portfolio of something going seriously awry with one of them (see Diversification, Shares).
