Deresh Lawangee, CEO of Easyretire RISE, wrote a guide that breaks down complex financial terms into simple, everyday language, making it easier for everyone to understand and engage with their investments.
As investment professionals, we have, somewhat innocuously (or maybe not), created a world of complex language that feels like it belongs in an ancient scroll rather than a conversation about your retirement fund. The investment, pensions, and savings industry is often filled with jargon that, while useful to insiders, feeds the seeds of distrust and elitism that many people outside the industry feel toward us. Sometimes I think of non-investment people as the “muggles” from Harry Potter—which is absolutely wrong!
Understanding investments and using investment tools to secure financial well-being should be a basic right for everyone. It fits perfectly with our mission of democratising investments at EasyRetire. After all, the magic of financial security shouldn’t be reserved for those in the know. But here's the catch: for the curious few (and hopefully many more in the future), the allure of this arcane language can spark a desire to dive deeper. People become fascinated by the mysterious terminology and might even want to pursue careers in investment theory and practices—much like I did.
So, for anyone who's ever been mystified by the world of investment jargon, here's a lexicon of a few key terms to help level the playing field for the "muggles" (yes, I’m sticking with the metaphor):
- Bips
“You mean bips? Like what babies do when they hiccup?”
No, "bips" is short for "basis points." A basis point is 1/100th of a percent. So, if someone says, “We’re lowering fees by 50 bips,” they mean half a percent. No babies involved.
- Dark Pools
“Sounds like a secret society of swimming pools for villains.”
Not quite! Dark pools are private exchanges where big trades can be made without the rest of the market knowing. It’s used by large institutions to avoid causing price swings in the market. Secretive? Yes. Evil? Not really.
- Contango
“Is this a spicy new dance move?”
No dancing here—contango describes a market situation where futures prices are higher than the current price of the underlying asset. It happens when traders expect prices to rise over time. Less tango, more predicting the future.
- Disco
“Boogie nights and bell bottoms, right?”
Not this time! In investment lingo, disco refers to a discount. When something trades below its intrinsic value, we call it a discount—or for short, "disco." So, we’re not heading to a club, but maybe we’re getting a deal!
- Side Pockets
“Is this where I put my snacks?”
Not quite. Side pockets are used by hedge funds to keep illiquid or hard-to-sell assets separate from more liquid ones. Think of it as the fund’s special stash of things that take time to sell—kinda like the secret stash of candy you hide in your desk drawer.
- Alpha
“Is this about asserting dominance?”
Sort of! In investment speak, alpha measures an investment's performance compared to the market. If your fund delivers "alpha," it means you’ve beaten the market. You are, in fact, asserting your dominance—financially.
- Beta
“So, alpha’s less cool sibling?”
Correct! Beta measures how much a stock moves compared to the market. A beta of 1 means it moves with the market, more than 1 means it’s more volatile, and less than 1 means it's more stable. It’s the less aggressive, more dependable sibling of alpha.
- Long Position
“How long is this going to take?”
Not too long, don’t worry! A long position is when you buy a stock expecting it to go up in value over time. Basically, you’re in it for the long haul.
- Short Position
“So, this is the opposite of long?”
Exactly. A short position is when you borrow a stock and sell it, hoping its price will fall so you can buy it back cheaper and return it. It’s risky and definitely for the daredevils among us.
- Long/Short
“Can’t make up your mind?”
This is actually a strategy where investors hold both long positions (hoping prices will rise) and short positions (betting prices will fall). They’re trying to win in both directions—kind of like covering all your bases.
- Delta
“The airline, right?”
Nope. Delta measures how much the price of an option will change based on the price movement of the underlying asset. It’s basically how sensitive your option is to price changes. Less about flying, more about price fluctuations.
- Short Squeeze
“Sounds painful.”
It can be! A short squeeze happens when a stock’s price starts rising rapidly, forcing short-sellers to buy back their shares at a loss, which drives the price up even further. It’s financial panic in action.
- Gamma Squeeze
“Now we’re getting scientific!”
Close! A gamma squeeze is like a short squeeze on steroids. It happens when the price rise is exaggerated by options traders needing to adjust their positions, creating even more buying pressure.
- Clean Pricing
“A clean deal, no mess?”
Kind of! Clean pricing refers to a bond price without any accrued interest. It’s like the base price of a bond, without the extra bits added on.
- Dirty Pricing
“Do I need to wash my hands?”
Not at all! Dirty pricing includes the accrued interest, so it’s the full price of a bond, all in. It’s called "dirty" because it includes more than just the clean base price.
- Portable Alpha
“This sounds like something I can take with me?”
In a way, yes! Portable alpha is an investment strategy where you separate the alpha (returns from skill) from the beta (market returns) and carry it over to other investments. Think of it as putting your good returns in your backpack and taking them on your next adventure.
- Hedge
“A garden hedge?”
No, in finance, a hedge is a strategy used to reduce risk by taking an offsetting position. It’s like having an insurance policy on your investments.
- Liquidity
“Is this about water?”
Nope! Liquidity refers to how easily you can buy or sell an asset without affecting its price. Cash is very liquid, while selling a mansion might take a while.
- Arbitrage
“Sounds like pirate talk!”
Not quite. Arbitrage is the practice of taking advantage of price differences in different markets. Buy low here, sell high there—basically risk-free profit!
- Futures
“Is this a time-travel thing?”
Not quite. Futures are contracts where you agree to buy or sell something at a set price on a future date. It’s a way to bet on what’s going to happen later.
- Put Option
“Put what where?”
A put option is a contract that gives you the right (but not the obligation) to sell an asset at a set price before a certain date. It’s a bet that the asset’s price will fall.
- Call Option
“Do I need to make a call?”
No phone calls needed! A call option gives you the right to buy an asset at a set price before a certain date. You’re betting that the price will go up.
- Market Maker
“Like someone who builds a market?”
Close! A market maker is a firm or individual who provides liquidity by buying and selling stocks at publicly quoted prices.
- Yield Curve
“A curvy road?”
Not quite. The yield curve shows the relationship between interest rates and the maturity of debt securities. It’s used to predict economic changes.
- Leverage
“Am I lifting something heavy?”
Kind of. Leverage in finance means borrowing money to increase the potential return on an investment. It’s like using a small effort to move big money.
- Margin Call
“Is someone calling me?”
Not quite. A margin call happens when your broker asks you to deposit more money because the value of your investments has dropped. It’s basically the financial world’s version of an "uh-oh" moment.
- Unicorn
“Is this about magical creatures?”
Yes, but in finance, a unicorn is a privately held startup valued at over $1 billion. Still pretty magical!
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