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Investing Terms Made Easy For You – Part 2

We had earlier looked at some of the commonly used terms in investing and finance. But now, I’ll like to up the ante and introduce less commonly used terms that might just impress any dates you have who happen to be investing geeks (like us here at the Fool!).

Bo Derek

This term was more prevalent in the 1980’s and was mainly used to describe the perfect company or stock. It was inspired by the actress Bo Derek herself after her movie 10 was released. After the movie, many used the term “Bo Derek” for any stock which they deem to be a “perfect 10”.

Tracking Stock

A tracking stock is a type of security whose main purpose is to track the performance of an underlying business or market index. In Singapore, the SPDR Straits Times Index ETF  (SGX: ES3) and the Nikko AM Singapore STI ETF  (SGX: G3B) could be considered as tracking stocks as they essentially track Singapore’s stock market benchmark, the Straits Times Index  (SGX: ^STI).

Boiler Room

Boiler rooms, now made famous by the recent Hollywood movie The Wolf of Wall Street, represents a fraudulent brokerage company that uses high pressure sales techniques through telephone calls to push speculative companies to inexperienced investors. Such brokering methods are considered illegal in most countries but are perhaps less regulated in some smaller emerging markets.

Cookie Jar Accounting

Cookie jar accounting is a term used to describe a company that’s attempting to smooth out their earnings. The end result of a company using cookie jar accounting is that investors might be misled into thinking that said company with smoothed-out earnings actually has defensive characteristics that can produce steadily growing earnings regardless of market conditions – when it is not.

This is how it’s done: A company might typically try to create a “cookie jar” reserve during good years, reducing their reported earnings by a little during those times and then releasing those reserved-earnings during lean years to artificially pad up its results.

Cookie jar accounting is a form of financial manipulation and companies might have to pay a steep price if caught.

Graveyard Market

A graveyard market describes a market where transaction volumes have decreased by a huge magnitude. This could happen if a prolonged bear market exists. In fact, even a short bear market, like it was during the global financial crisis in 2008, could be known as a graveyard market as well if there were simply no transactions being made.

It can be understood in terms of investor psychology as the point where holders of securities are reluctant to sell as they do not want to realize their huge losses while new investors are wary about any purchase due to the weak market sentiment.

Foolish Bottom Line

There are tonnes of financial terminologies that are out there; what we have touched upon is really just the tip of the iceberg. Fortunately, it is just not that important to learn every single term out there. After all, the main objective in investing is to let your money work for you and not be a walking encyclopaedia who knows his alpha from his beta, and Charlie from his Buffett.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.