Tuesday, September 23, 2008


The season which began yesterday is called fall because autumn is when leaves fall in temperate climes. But leaves are not falling. Stock prices are. In observance of current events, I thought I’d go over some vocabulary items that are or will shortly be in the news.

English has two distinct words bail. One is rooted in Old Icelandic and refers to the curved handle of a pail and similar objects (the bail of a Conestoga wagon or of a fishing reel, for example). The word bow is related.

The other word bail comes from a Latin word for carrier or porter and refers to the bucket the curved handle is attached to, but don’t let that confuse you (although it always confused me until I looked the word up today). This is the bail of bailing water out of a boat, bailing out of a burning plane, abandoning an enterprise, bailing a company or person out of a predicament, and bailing an investment banker out of jail.

business and finance
We’re so used to seeing and hearing business and finance as a news category that it’s easy to forget they’re two different things. The trope heard most often these days to distinguish them is “Main Street” and “Wall Street,” and that’s as good a way as any to think of them. Finance refers to renting out money for interest, the object of which is to end up with more money than you started with. Business generally refers to providing goods or services, presumably at a profit, an activity that depends on the ready availability of money, which is often borrowed from financiers.

the real economy
Here’s another phrase being trotted out by current commentators, reporters, and news analysts. On the radio, you can almost hear the air quotes. The real economy encompasses all levels of business, including agriculture and mining, manufacturing, distribution, wholesale and retail trade, and services. It also includes the status of individuals in terms of their employment, healthcare, insurance costs, and taxes. That’s a much broader sweep than just business, which encompasses the condition of companies more than that of the people who work at those companies.

investors and traders
We often lump together everyone who owns shares in at least one company or mutual fund, but we shouldn’t. Traders focus on short-term ups and downs of stock prices, irrespective of the nature or condition of the companies whose stocks they are trading. Investors focus on the long-term profit potential of the companies whose stocks they buy. An individual can both invest and trade, of course.

Leverage is trading with borrowed money. This takes place entirely within the financial world, not the business world. If I have one dollar, I might be pretty sure I can make a trade that will net me a five-cent profit. On the strength of my good name and reputation, I can borrow thirty dollars, meaning that I stand to make a buck-fifty, minus the interest I have to pay on the thirty dollars. Obviously, if all I have to my name is one dollar, I’d rather make a buck-fifty with it than a nickel. So I’ll take the risk of borrowing the thirty dollars. But if instead of making money I lose a buck-fifty, all of a sudden I owe more than I have. That’s the downside of leverage.

Ponzi scheme
A Ponzi scheme, named for Charles Ponzi, who pulled it off around 1920, is a financial pyramid in which funds from new investors are used to pay profits to prior investors. There is no money left to pay off the last investors in, and they lose their money, unless, of course, the last investors in are able to print money at will, in which case the losers are the holders of the currency whose value is thus diluted.

1 comment:

Michael A. Banks said...

Remember when failed investors used to just jump out of skyscraper windows?