Glossary of financial terms :D

Another attempt as glossary to financial terms, on a lighter note!!!

Alimony: The evil curse that chases you even after divorce.

Amortization: Convincing yourself that your expense will be adjusted over a period of time.

Balance sheet: At the end of which you realise that your company's balance is at stake.

Basis Point: Another MBA way to exaggerate decimal points and freakout people.

Bear market: Something that follows always after your huge investments.

Big Mac index: Index that mocks all other stock market indices.

Bull market: Something that follows always after you sold off your investments. 

Buy and hold: A strategy adopted when you don know what to do with your money.

Dividend: A sum of money, determined by a company's directors, paid to shareholders to keep their mouth shut!

EBIT: Earnings before irregularities and tampering. (ref: David Bond)
EBITDA: Earnings before I tricked the dumb auditor. (ref: David Bond) 

EPS : You realize that "Entire portfolio sucks!!"

Financial planner: An investment professional who helps with financial plans to take over all your money in the long term.

Junk bond: Bonds that are actually, junk!!! 

Limit order: An order to buy stock followed by bull market.

Market order: An order to buy stock followed by bear market.

Price to book ratio: Something that shows the real picture of all virtual money.

Real rate of return: Loss rate after rate of return is adjusted for inflation.

Risk: Whose value is zero only after death.

Security analyst: Born to screw yourportfolio.

Stock split: When your ex-wife and her lawyer split all your assets equally between themselves.(ref:David Bond)

Yield to maturity: Something which gets more importance than you from your wife.

Deepwater Horizon Oil spill - The biggest ever made Chocolate fudge !!!

Its an year over today, since the biggest chocolate fudge was started preparing. On April 20,2010, the British Petroleum's Chocolate fudge preparation in the Gulf of Mexico was initiated by a buildup of abnormal pressure in their oil drilling platform - Deep horizon followed by a jet of methane gas under high pressure getting ignited when trying to escape through the drilling columns. This methane gas explosion started the ignition of the entire platform - which acted as the stove for the fudge preparation.

This oil leak which lasted for 5 months leaked almost 5 million barrels of oil in to the sea and USA got the proud certification of the world's best polluter of the environment. The effects of this chocolate fudge in sea couldn't be explained in words!!! What more cruel can man do to nature!!

British Petroleum was blamed for not having followed adequate safety norms before explosion and for not able to control the leak after it started. The job that they had to do is to put a cap on the pipe where the leak was happening. But its not as simple as putting on a condom!!
It required strenuous scientific efforts by the entire team and US government. The leak part before and after the sealing of the cap is shown below:

The leak had so many lessons to teach to the mankind! And one year after one of the worst accidents, the Food and Drug Administration has found only 13 out of 1735 tissue samples from sea food show traces of oil residues. And that the sea food is safe to consume. Other than teaching us lessons, and giving huge losses to BP, this incident atleast helped some small scale industries to grow by printing t-shirts on this theme. Some hit t-shirt designs were:

This chocolate fudge is not only the biggest but also the most expensive one to mankind and nature!!!

Let's pray that we don't face such a disaster atleast in our lifetime.

Bread is more liquid than beer!!!

How come bread is more liquid than beer when it is comes under solids according to 6th grade physics? Well, this is possible in finance, under the topic liquidity!! 

A businessman committed suicide because of stock market crash leading to overload of debts and loans. The responsibility to repay the debts fell on his son, Shahrukh's head. Shahrukh was hoping to settle all the debts by the left over assets in their business - huge crates of beer and a few loaves of bread. Now, after the stock market crash, no one had enough money to buy beer in the market, which was costing 200 bucks. But they could buy bread which sold only for 20 bucks. So Shahrukh could make money only through selling breads as he could not sell any beer. Only bread yielded money and not beer, though he had lots of beer crates to settle all his debts. So, here we can say bread is more liquid than beer.

Liquidity, at its simplest and best definition is - the probability that an asset can be converted into an expected amount of value within an expected amount of time without making any losses. If beer can be traded within the time Shahrukh expected and at the price he expected, it would have been more liquid. But now, all Shahrukh could do is to drink a few bottles of beer now and then to forget the pain of debts.

Note that both time and value are important in defining liquidity. Many banks crashed in the sub-prime crisis because they couldnot convert their assets into liquid cash whenever they wanted. One hilarious quote to be mentioned here is George W. Bush's serious statement on liquidity in the markets in 2008 - "This thaw -- took a while to thaw, it's going to take a while to unthaw." It was also quoted that the sub-prime crisis was worse than divorce for traders because, you lost more than half of your wealth and still couldn't get rid off his wife!!!

A bank account holder goes to an ATM and it says "insufficient funds". He starts wondering if its his funds or the banks funds that is insufficient. Imagine the height of liquid crisis that when robbers go to rob a bank and they find nothing in the bank's vault. Robbers will be cursing the bank for poor liquidity management! 


One good thing about this crisis is that the bankers when questioned about this credit crunch, they dont ask back - "which flavour is that candy-bar?"


We have another simpler definition for liquidity for those die-hard accounting fans -"Liquidity is when you look at your retirement funds and wet your pants."

How to KISS???

Now I am not teaching you how to kiss but to KISS.
KISS stands for Keep it simple, Stupid!!!

Let me follow this KISS principle. Let me "Keep it Simple and Sweet". Let me "Keep it simple and straightforward."

Use Occam's razor always. By the way, this razor doesn't shave your beard. But it shaves off the beard-like-unwanted-stuff from the problem you are looking at. Meaning, it is just a complicated explanation of KISS principle instead. Stupid Occam (actually Ockham) didn't keep it simple here.

Some big times comedies that failed to follow KISS principle are here:

PizzaHut introduced new sizes for their Pizzas to attract more customers. Those sizes were - large and big. Now here the confusion starts that whether the large one is bigger than the big one or the big one is larger than the large one. They just complicated it and confused their customers.

RJ Reynold's smokeless cigarettes were a terrible flop in 1988. How do you expect to sell a cigarette without

smoke in the market? Why cant they just "KISS"?

A 2009 survey by British Telecom Home IT support reveals that 71% of Britons have upto 10 electronic gadgets that are unused because of their complicated  features and so called "user-friendliness".

So the simple message is that always keep KISSing. Another small pick from my favorite novel- "Deception point" (Dan Brown) says - "When multiple explanations exist, the simplest is usually correct." Very true!!!