Wall Street Jargon – Strategence Capital

Wall Street Jargon: Rebalancing

Graig Stettner — Mon, 08 Mar 2021 14:00:51 +0000

This may mean different things to different folks on Wall Street, but to us, it means the systematic reallocation of an investment portfolio that has strayed from its target allocations. At the most basic level, a portfolio comprised of a stock fund and a bond fund, with a normal allocation of 60% and 40%, respectively, that has strayed to 63% and 37%, respectively, would have 3% moved from the stock fund to the bond fund.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Please note that rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.

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Wall Street Jargon: Fundamental Analysis

Graig Stettner — Mon, 24 Aug 2020 15:01:59 +0000

Fundamental analysis involves looking at a company’s fundamentals, things on the financial statements, such as earnings and revenues, assets and liabilities, in an effort to determine if the company is a good investment prospect. Not all good companies make good investments, so it’s important to pair this analysis with an analysis of the stock price. For one example of this, click here, where we briefly describe one way of analyzing stock prices.

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Wall Street Jargon: Wall of Worry

Graig Stettner — Mon, 27 Jul 2020 13:47:37 +0000

Do a Google search on the phrase “wall of worry,” and you’ll find about 370,000 hits on the exact phrase. So what is it?

A wall of worry is the long list of reasons why stocks shouldn’t continue to climb. Put differently, the wall of worry is all of the reasons investors should sell stocks. Stocks are said to “climb a wall of worry.” The chart below is a common one you’ll find accompanying stories on the web about the wall of worry.

The reason I think this happens is because by the time the reasons are known, they’re already priced into the market. If you’re interested in learning more, check out an earlier post about the wall of worry and skittish investors.

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Wall Street Jargon: Asset Allocation

Graig Stettner — Wed, 17 Jun 2020 13:00:48 +0000

Asset Allocation is a phrase that’s frequently thrown around by the financial press and financial advisors. It refers to the mix of investments in an account or group of accounts and is frequently shown in a pie chart. It is often done at a very high level, meaning the mix of the broadest categories of investments, such as stocks, bonds, and cash. It might be further broken down by types of stocks, such as large-company stocks or foreign and domestic stocks; bonds might be broken down by short-term, intermediate-term, and long-term. Asset allocation is important because it may provide an approximate view of the amount of volatility likely to be experienced and/or it can give an idea of one’s diversification.

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Wall Street Jargon: Index Fund

Graig Stettner — Tue, 16 Jun 2020 19:08:00 +0000

This has become a common phrase as investors have increasingly invested in indexed products. An indexed product, including various types of funds, is one whose holdings are based on some underlying index.

So, what’s an index? Here’s what Investopedia says:

An index is a method to track the performance of some group of assets in a standardized way. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market. These may be broad-based to capture the entire market such as the Standard & Poor’s 500 (S&P 500) or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment. Indexes are also created to measure other financial or economic data such as interest rates, inflation, or manufacturing output.

An index fund holds securities in the same proportion as the index, itself. So, if Stock A comprises 5% of an index, it’ll comprise 5% of an index fund, all else equal.

Let’s use a less technical description. Think of a recipe for a chocolate cake. The recipe card is like the index – it doesn’t change, although the conditions of the kitchen, or your ability to carry out the instructions may. The cake you make based on the recipe is like the index fund. You can make many cakes based on the single recipe card, but the original recipe stays the same. Back to the non-cake stuff, though. Depending on how a fund is constructed and on the usual fluctuations, it will likely not always hold the exact percentage as its underlying index, but it will be close.

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Wall Street Jargon: Price to Earning Ratio

Graig Stettner — Wed, 27 May 2020 15:04:23 +0000

The price to earnings ratio, or P/E ratio, may be the most common of the valuation ratios. These purport to measure how expensive a stock is. It’s a comparison of the price to some measure of earnings per share—usually the last 12 months’ earnings. So, a stock selling for $10 and with trailing 12 months earnings per share of $1 would have a price to earnings ratio of 10:1. Typically one would say its P E is ten; it’s not necessary to say ratio. Another way to look at the P/E is to say it’s the price of $1 of earnings.

On its own, a P/E doesn’t really convey much without something to compare to, like the P/E of other stocks or the stock market. If we have two identical companies—extremely unlikely—and one has a higher P/E, we would say that stock is more expensive, but make the companies at all different—one growing faster than the other, for example—and the conversation changes.

If one of the companies is growing more quickly, one would expect investors to pay more for a dollar of earnings, because next year the earnings of the more rapidly growing company will have grown more. Because of this, different measures of the price to earnings ratio have been created, such as using next year’s estimated earnings instead of the last 12 months.

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Wall Street Jargon: Priced In

Graig Stettner — Mon, 18 May 2020 15:55:17 +0000

If you spend any amount of time in the world of finances reading, listening, or otherwise paying attention, you will likely encounter words and phrases that do not crop up in mainstream vocabulary. In an effort to improve clarity and transparency, we hope to explore some of these terms in upcoming posts.

A phrase that gets used often with the Wall Street set is “priced in.” It stems from the efficient markets hypothesis, which says that all publicly-available knowledge is already reflected in stock prices, and that only non-public information is not reflected. To say something is priced in means that the something is already reflected in stock prices.

So, for example, on December 31, 1999, the fear of a Y2K disaster was already priced-in to stocks.

Here’s a current example that was featured in the Wall Street Journal’s “Daily Shot” publication.

So, to some degree, stocks are pricing in a risk of a second wave of the Coronavirus. In fact, it’s the biggest fear of investors in this survey. In this case, other fears are being reflected in security prices, too.

While all of that may be knowable, what is unknowable is the extent of a second wave that’s priced in.

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