7 Bizarre Phrases That Wall Street Insiders Use Every Day

posted on 06-07-2019

When I received my MBA 20 years ago, I thought I was pretty well versed in the world of finance. But when I got to Wall Street that summer, I was quickly overwhelmed.

A litany of phrases were tossed out that I never read about in my finance textbooks.  Here's just a small sample of investing phrases that they never talked about in b-school.

1. "I'm looking for the stock to consolidate from here."

Translation: I expect this stock to start falling and wouldn't want to buy it. This is a similar sentiment to a Wall Street downgrade from "buy" to "neutral" or "hold." Such downgrades actually mean a stock is very unappealing and bound to fall in price. Analysts use that code to avoid the dreaded "sell" rating, which can alienate them from the companies they follow.

2. "I smell a secondary."

A secondary public offering, that is. Whether it's due to a cash crunch, the need to raise funds to make a major investment, or just an opportunistic time to raise cash when share prices are high, companies periodically replenish their balance sheets. And investors try to handicap when a company will soon announce a secondary public offering (as opposed to the initial one-time initial public offering (known as an IPO) of shares. )

If there is a good chance that a share offering is coming, many investors quickly sell their holdings. That's because lining up demand for fresh shares at current prices is often difficult, leading a company to lower its offering price to entice investors. And any deal that is priced below the current stock price will invariably pull the stock price down to the new lower level.

3. "Those spreads will kill you."

The difference between the bid and ask prices for a stock (known as a trading spread) are established by market makers (on the Nasdaq) or specialists (on the New York and American Stock Exchanges). Smaller companies are often subject to low trading volumes, and without a lot of action, market makers and specialists are content to keep those spreads far apart, sometimes by a nickel or a dime. And that spread can act like a tax, robbing you of gains when it comes time to sell the stock back to the market maker or specialist. That's why some investors will only seek out stocks with tight spreads, usually two cents or less.

4. "The deal is instantly accretive."

Ever notice how a stock will sometimes fall sharply when a company announces a major acquisition? That's because investors express concern that the deal will lead to too many new shares being issued (which can dilute per share profits), or the acquisition will be hard to integrate into a company's existing operations (known as "acquisition indigestion.")

Yet some deals hold instant appeal, simply because the acquisition is expected to boost profits at a faster pace than the share count grows. This is known as an "accretive" (rather than dilutive) deal and should almost always be welcomed by investors.

5. "You want that in a paired trade."

Analysts can sometimes be enthusiastic about a stock while conceding that the broader industry they follow may hold the same appeal. Indeed an investor exodus from a whole industry or sector can lead to losses in a stock that has comparatively better prospects. So these analysts suggest you invest in the company they recommend but also take a short position in another company in that industry. In effect, you are removing what is known as "market risk," "sector risk" or "industry risk" and just focusing on the relative upside for a given stock.

6. "The earnings are high quality."

Analysts often speak about the quality of a company's earnings, differentiating between companies that deliver clean, transparent results every quarter, and companies that habitually resort to a series of one-time gains or charges to artificially generate a specific quarterly profit.

In a similar vein, investors should always steer clear if a company has "one-time" charges or gains every quarter, simply because the practice is misleading. Most of the time, these repeated accounting changes are just a normal part of doing business, and if they constantly recur, then management is trying to slap "lipstick on a pig."

7. "Whisper number."

Investors often assess a company's near-term prospects by the directional change in earnings estimates. A rising estimate may signal an imminent good quarter. But as you get closer to the actual earnings release date, such numbers become irrelevant. In the final weeks leading up to earnings announcements, most analysts won't change their formal earnings estimates (which are published on sites such as Yahoo Finance).

Instead, these analysts call up their favorite clients to privately share their current thinking about expected quarterly results. Pretty soon, these numbers are "whispered" from trading desk to trading desk, and by the time actual results are released, share prices will have responded to the whisper number, and not the formal earnings estimates that most investors will see.

The Investing Answer:  It's important to think like an advanced investor, and understanding all of the little tricks of the trade, as embodied in these phrases, will help sharpen your game.

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