Learn New Wall Street Terms

Here’s a guest post from a fellow blogger who is truly inquisitive about the economy, stock market, and all things financial. Investment terms can be overwhelming and hard to understand, but if you study up on just a few terms a week, you can become a savvy investor in no time — or at least you can talk like one!

Learn New Wall Street Terms

by InquisitiveAboutFinance

This latest downtrend or recession has taught a common man many new financial terms. These terms are not new to the financial sector, they were just buried under the good economy for some time. Now, they are becoming part of our everyday conversations.

1. Ponzi Scheme: A Ponzi scheme is also known as a pyramid scheme. It’s a fraudulent investment plan promising very high returns to investors from their own money or money paid by earlier investors rather than from any actual profits earned. One common way for the Ponzi scheme to attract investors is with the promise of high short term returns. This scheme was named after Charles Ponzi who made this scheme popular in the 20s. Thanks to Bernie Madoff this scheme was brought again into the limelight!

The US Federal Trade Commission says that because of the pyramid’s very nature, at least 70 percent of those who invest in a Ponzie Scheme will NOT see any returns and will lose their investment. It is mathematically impossible to recruit enough investors to pay out to all levels of the pyramid.

2. Uptick Rule: According to Wikipedia, “The Uptick Rule is a securities trading used to regulate short selling in the markets”.  Uptick is the selling of stock or securities at a higher price than its last sale price. The Uptick Rule is a US regulation that a security cannot be sold short unless the trade before the short sale is at a lower price from when the short sale took place.

In 2007 this rule was eliminated in order to study its effectiveness. The Uptick rule is something Jim Cramer had been proposing to bring back for quite some time in his famous Mad Money. Due to the recent sell off in the markets, the SEC and Rep. Barney Frank announced plans to restore the Uptick Rule. We will see what long term effect this will have. Short term results have been good as the DOW, S&P and NASDAQ surged soon thereafter.

3. Deflation. Although practically everyone knows what deflation is, no one has heard this term so widely spoken until recently. Deflation in simple words is reduction in prices of goods and services. With recent decline in home, oil, and energy prices the economy is moving towards a less inflationary or into a deflationary mode. The FED is injecting a lot of amounts of money to increase inflation and at the same time kept the inter bank short term ratios very low. Typically the economy is in higher inflationary mode before entering a recession.

4. Hedge Fund: A type of fund that can use more aggressive strategies than other investments or mutual funds are allowed. Hedge funds are mostly used by the wealthy (and by institutions) since the minimum investment required is from $250,000 to over $1 million and no more than 100 investors are allowed into each fund.  They are exempt from many of the regulations that most mutual funds have to abide by. One of the common ways hedge funds offset their losses is by short selling the market. Short selling refers to selling an investment in the hope of buying it at a lesser price.

Do you have any new terms to add to this list?