Investing Catchphrases You Need to Know

Investing Catchphrases You Need to Know

Have you ever found yourself scratching your head while listening to the stock chatter on CNBC? You're not alone, with the exception of the secret service and FBI, finance has more "secret code words" than any industry. Today, I'm going to explain some commonly used catchphrases so you can decode the stock jocks' banter. Some of these terms are important for retail stock investors to know and some are just fun to know. 

1
Dead Cat Bounce

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The dead cat bounce refers to a brief, short-lived, recovery in a stock that has already dropped substantially. The phrase also can be used when describing a bear market, down economy, or anything else that can decline. 

Example: XYZ stock drops 30%. The stock then rallies 10% in two days, before dropping 15% and staying down. The 10% two-day rally would be the "dead cat bounce."

Like all short-term market or stock price movements, dead cat bounces are hard to predict. The only real indicator is if the declining stock in question has truly awful fundamentals. If so, any rally might be due to short-sellers closing positions or traders speculation, making it a dead cat bounce. 

2
Short Squeeze

Short sellers (investors who bet against a stock by lending shares and then selling them) are huge risk takers. The reason is simple, when you go long a stock your downside is 100% (if the stock goes to zero), but shorting a stock has a limitless downside because a stock can go up 100%, 200%, or even 5,000%. 

When a stock that's heavily shorted has unexpected good news, many short sellers close their position in a panic. This "squeeze" can cause the stock to surge much higher than it ordinarily would on good news alone. 

Retailers who miss analyst expectations or have bad quarterly results, often attract high short interest. The same is true of fast growing retail stocks, short-sellers will target the stock if they think its price has become too rich.

While the possibility of a short squeeze isn't reason enough to buy a stock, it can be an added bonus. If you've done the homework and decided a retailer with high short interest is a buy, a short squeeze can definitely sweeten the story. 

3
Organic Growth

This is a critical one for retail stocks. Organic growth is a result of customers visiting stores more often and spending more money. Non-organic "growth" often looks like the following:

  • Cost cutting to boost short-term profits
  • Opening new stores to boost top-line revenue
  • Price increases that boost revenues, without gains in foot traffic

All of the above can be good things if organic growth is also part of the equation. The key differentiator is same-store sales growth and increased foot traffic. If both are rising, then all of the above can follow nicely. If same-store sales and foot traffic (i.e. organic growth) stall, everything else is questionable at best. 

You wouldn't want a retailer to open new stores when existing ones aren't growing. So you shouldn't buy a retailer that doesn't have organic sales growth. 

4
Market Cap

 Market cap, or market capitalization, is the value of the company behind a stock. If a private investor bought every share, at the current stock price, it would equal a businesses market cap. 

This is an important term for two reasons. First, it's another tool for valuation. A stock with a high P/E ratio, high P/S ratio, and a high PEG ratio will often have an undeserved market cap. Second, it helps you have expectations for your stocks. Small-cap stocks are smaller companies with higher potential for growth and increased volatility. Large-cap retailers like Home Depot have, perhaps, less upside but they tend to be steadier growers as well. 

While this isn't a complete list of investing catchphrases, it's a good start. Consider it step one in our quest to decode Wall Street, with many more to follow!