Finance and Its Fancy Lingo

There has always been a continuous debate as to whether finance is more properly characterized as an art or as a science. I am not to make a claim but for me, there is something so artistic and fascinating about the world of finance that separates it from undoubtedly scientific fields like Mathematics: its ever extravagant lingo.

Mathematics is a very systematic study – systematic even in the way it gives a term for something. First, it often uses Greek letters predominantly for numbers, sets, functions and spaces. It needs a large number of symbols to stand for these abstract objects but its wide use of Greek letters provides a collection of useful symbols to supplement the Roman letters. Second, it sometimes uses Greek prefixes as is the case in naming polygons, polyhedra, and polynomials. Such simple, systematic and consistent way of coming up with a terminology is not observed in the field of finance.

In Math, we know that Euclidean geometry, Euclidean metric, and Euclidean algorithm are all from Euclid just as Abelian groups are from Abel, and Eulerian graphs are from Euler. Likewise, Roman numerals are so called because they are a numeral system originating in ancient Rome. This makes me question why Eurobond and European option are so termed if Europe has nothing to do with them!

In Math and other disciplines, we typically use the Latin prefix semi- to an object that is half of or partly something. We have such words as semicircle, semiperimeter, semiannual, and semiformal. Now, how come a combination of American and European style options is never named semi-American or semi-European? It is because the people from Wall Street have found just a more ingenious name for it: Bermuda options! Note that it only makes sense if you're aware that Bermuda is that tiny place that is nearly halfway between the United States and Europe.

As you may have already noticed, financial jargon has very rich etymology. More often, it is influenced by popular culture. There exist countless financial terms now that alludes familiar elements in pop culture so as to portray something in finance. A good example is voodoo accounting which describes a form of financial statement manipulation. In western countries, the word “voodoo” suggests witchcraft and mysterious occurrence. Hence, in voodoo accounting, what is likened to”witchcraft" is the use of accounting gimmicks to conceal what it truly going on with the firm, resulting to "mysteriously" high revenues or assets. Another example is Santa Claus Rally, which takes place between Christmas and New Year’s Day. Just like Santa Claus who allegedly gives presents to the children, this rally brings presents to the investors in the form of a climb in the share prices.

Sometimes, a financial term can have biblical reference. You probably have heard already the phrase “baptism of fire”, citing Matthew 3:11. It is generally used to denote a first painful experience and in finance, it describes a tough challenge faced particularly by a company. It can be a situation like an IPO, merger or acquisition, or election of new officers. Other times, finance derives its terms from concepts from other fields, such as Chemistry. For instance, the term acid test ratio comes from the method of determining whether a metal is a real gold. Gold, unlike other metals, does not corrode when immersed in acid. Just as the acid test becomes a test of reliability, the acid test ratio becomes a test of financial integrity for firms.

Also observe how people from Wall Street come up with a name for a graph: it just requires a rich imagination. Unlike in Math, you don’t have to discuss the concavity, slope, or curvature of the graph. You are not required to identify its critical points, points of inflection, or intercepts. To recognize a pattern, you just have to think of the thing that it most closely resembles. For instance, cup-and-handle pattern is a popular chart patterns in technical analysis and as you might imagine from the name, this pattern resembles the shape of a tea cup. Needless to say, a head-and-shoulders pattern looks like a head with two shoulders. Hence, you should not wonder anymore how the flag and pennant patterns, and saucer bottom patterns should appear. Other non-technical analysis graphs like volatility smile, butterfly spread and Christmas tree also share the similar etymology: their names are a hint of what they look like.

The world of Mathematics will bombard you with alphas, betas and gammas. You’ll also become accustomed to hearing or even using phrases like almost all, arbitrarily large, sufficiently close, if and only if, and without loss of generality. If these are not yet nauseating enough, you’ll encounter more seemingly sophisticated terms like isomorphism, axiomatic system, parametric equation, affine planes, etc. This makes the subject sound dry, uninteresting and intimidating for many people. In contrast, the financial sector uses the language that everyone speaks. Though it may sound like good news, the truth is this language is embedded with mysterious codes that if you’re new to the industry, it can take a lot of untangling. So, to end my discussion, here are few more terms I have “untangled” when I first plunged myself into the sea of finance and its fancy lingo:

Fannie Mae and Freddie Mac are not famous Hollywood fraternal twins.

Pac Man is not the classical arcade game, nor is it the alias of a boxing champ.

Sleeping Beauty is not the popular fairy tale classic and Walt Disney animated film.

Whoever says being a technician does not pay well is wrong. In fact, in the world of investing, it is a white collar job that offers a lucrative pay if you’re good at it.

Detecting liquidity and solvency is a task not just for chemists. In fact, financial analysts love doing it too.

A lobster trap is made not to trap a lobster just as a shark repellent measure is done not to drive sharks away.

A golden parachute is not golden, nor is it a parachute. The same is true of a silver parachute.

A plain vanilla is not an ice cream flavor. It isn’t sweet, and most of all, it isn’t edible.