Hello Nairalanders,

I am inspired to start a new thread with the title referenced above. The idea is to create an interactive and educative platform where people can learn from one another, every day terminologies often used in our different fields of specialism. Definition of terms and concepts from budding "career specialists" in telecomms, oil and gas, all cadre of engineering, entertainment,education,health etc is welcome!

These terminologies should be defined in clear terms so that a "lay man" can understand and grasp them quickly. I work in finance (Private Equity) and would like to, with the express permission of the " forum moderators" set the balling rolling!

"Greater fool theory"

The greater fool theory (also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a greater fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price. It is similar in concept to the "Keynesian beauty contest principle of stock investing".

(Adapted from "Wiki" and Investopedia)

P.S. It will also do some 'good' if we reference properly any definition that is not original or quoted "inter alia" to avoid plagiarism. Thank you.

Herd mentality, please explain.

@ Nitrogen, Herd mentality describes how people are influenced by their peers to adopt certain behaviors, follow trends, and/or purchase items. Examples of the herd mentality include stock market trends, fashions in apparel, cars, taste in music, home décor, etc. It is a concept in behavioral finance that explains why investors are hardwired to mimic the actions (rational or irrational) of a larger group. Individually, however, most people would not necessarily make the same choice.

For example, if a herd investor hears that internet stocks are the best investments right now, he will free up his investment capital and then dump it on internet stocks. If biotech stocks are all the rage six months later, he'll probably move his money again, perhaps before he has even experienced significant appreciation in his internet investments.

(Adapted from "Wiki" and Investopedia)

Bagholder

The term bagholder is an informal slang term used in financial markets to refer to the shareholders left holding shares of worthless stocks.

The shareholders could be caught up in a corporate bankruptcy and accounting scandal, or the victims of a pump and dump scheme (similar to the "IPO/PO/Hybrid offer bubble" witnessed in the Nigerian banking sector around 2006-2008, in which naive and unsophisticated investors fall victim to spurious equity valuations, rigged stock tip/recommendations, or other tricks used by to drive up the shares of companies.

The term has also been applied as a term of derision to real estate investors.

The word is derived by combining shareholder with the expression "left holding the bag."

(Adapted from "Wiki" and Investopedia)



"Private Placement"

Private placement (or non-public offering) is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors.

Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market. Since the placements are private rather than public, the average investor is only made aware of the placement after it has occurred.

(Adapted from "Wiki" and Investopedia)

LBO vs. MBO

A leveraged buyout (or LBO, or highly leveraged transaction (HLT), or "bootstrap" transaction) occurs when an investor, typically a financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company.

A management buyout (MBO) is a form of acquisition where a company's existing managers acquire a large part or all of the company. In most cases, the management will buy out all the outstanding shareholders and then take the company private because it feels it has the expertise to grow the business better if it controls the ownership. Quite often, management will team up with a venture capitalist to acquire the business because it's a complicated process that requires significant capital.

(Adapted from "Wiki" and Investopedia)

Thanks Deenee for this thread. It is a pity it has not got the followership it deserves but let's see if we can change that:

Information asymmetry: This is the condition where the same information is not available to all the parties thereby resulting in one party not being able to make better decisions. Where there is information asymmetry, the party with the information is placed in a better position. Information asymmetry makes the market imperfect. For instance, I intend buying a fairly used car. The seller has touted the car's mileage and other features as first grade. I see the seller as being a snake oilskin salesman and I am afraid he may be trying to sell me a lemon. The seller is in a superior position to know about the car than I am. Thus exists information asymmetry between the seller and I.

There are ways of tackling information asymmetry such as due diligence, earn-outs, reps and warranties, etc.

Efficient Market Hypothesis (EMH): This is a capital market theory that the market is "informationally" efficient thus making it impossible to "beat" the market. This theory posits that the price of stocks or other publicly traded instruments reflect all the information on those instruments at that particular time. In order words, no investor can possibly steal a march on the market.

There are three strands of this theory:

The Weak EMH: The price of the traded instruments reflects all the past publicly available information on the instruments.
The Semi-Strong EMH: The price of the traded instruments reflects all the past publicly available information on the instrument and that the market is so dynamic as to promptly impound any fresh information out there in the price of the instrument.
The Strong EMH: The price of the traded instruments reflect the past, current and any hidden or insider information on the instruments.

For my part, I disagree completely with the Strong EMH, to an extent with the Semi-Strong EMH but I generally agree with the Weak EMH.

Definition of 'Fire Sale'

Selling goods or assets at heavily discounted prices. Fire sale originally referred to the discount sale of goods that were damaged by fire; it may now refer to any sale where the seller is in financial distress. In the context of the financial markets, fire sale refers to securities that are trading well below their intrinsic value, such as during prolonged bear markets.

(Culled from Investopedia)

"Balance Sheet"

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.

A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.

(Culled from "Wikipedia"

"Balance Sheet"

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization, such as an LLC or an LLP. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition". Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year.

A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first, and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.

Culled from "Wikipedia"

In financial accounting, a cash flow statement, also known as statement of cash flows or funds flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.


Culled from "Wikipedia"

Definition of 'Quantitative Easing'

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value.


(Culled Wiki and Investpedia)

Definition of 'Black Swan Event'

An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict. This term was popularized by Nassim Nicholas Taleb, a finance professor and former Wall Street trader. Black swan events are typically random and unexpected. For example, the previously successful hedge fund Long Term Capital Management (LTCM) was driven into the ground as a result of the ripple effect caused by the Russian government's debt default. The Russian government's default represents a black swan event because none of LTCM's computer models could have predicted this event and its subsequent effects.

The black swan theory or theory of black swan events is a metaphor that encapsulates the concept that an event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:

"The disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology"

Unlike the earlier philosophical "black swan problem", the "black swan theory" refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences.

(Culled Wiki and Investpedia)

What is Depreciation?
Depreciation is the process by which a company allocates an asset's cost over the duration of its useful life. Each time a company prepares its financial statements, it records a depreciation expense to allocate a portion of the cost of the buildings, machines or equipment it has purchased to the current fiscal year. The purpose of recording depreciation as an expense is to spread the initial price of the asset over its useful life. For intangible assets - such as brands and intellectual property - this process of allocating costs over time is called amortization. For natural resources - such as minerals, timber and oil reserves - it's called depletion

(Culled from Investopedia)

Definition of 'Discounted Cash Flow - DCF'

A valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.


In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted to give their present values (PVs) — the sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question.

Using DCF analysis to compute the NPV takes as input cash flows and a discount rate and gives as output a price; the opposite process — taking cash flows and a price and inferring a discount rate, is called the yield.

Discounted cash flow analysis is widely used in investment finance, real estate development, and corporate financial management.

Culled from Wiki and Investopedia

Definition of 'Private Investment in Public Equity - PIPE'

A private investment firm's, mutual fund's or other qualified investors' purchase of stock in a company at a discount to the current market value per share for the purpose of raising capital. There are two main types of PIPEs - traditional and structured. A traditional PIPE is one in which stock, either common or preferred, is issued at a set price to raise capital for the issuer. A structured PIPE, on the other hand, issues convertible debt (common or preferred shares).

This financing technique is popular due to the relative efficiency in time and cost of PIPEs, compared to more traditional forms of financing such as secondary offerings. In a PIPE offering there are less regulatory issues with the SEC and there is also no need for an expensive roadshow, lowering both the costs and time it takes to receive capital. PIPEs are great for small- to medium-sized public companies, which have a hard time accessing more traditional forms of equity financing.

(Culled from Investopedia)

Hi Deenee, I would like to run some ideas by you. Could you send me your email addy. Thanks in advance

Definition of 'Tragedy Of The Commons'

An economic problem in which every individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits. Generally, the resource of interest is easily available to all individuals.

The tragedy of the commons occurs when individuals neglect the well-being of society (or the group) in the pursuit of personal gain. For example, if neighboring farmers increase the number of their own sheep living on a common block of land, eventually the land will become depleted and not be able to support the sheep, which is detrimental to all. A typical example in Nigeria is the construction of shops in every nook and cranny of Nigeria especially around the Lagos and Abuja axis.

(Culled from Investopedia)

Dead-cat-bounce: A quick rise of a stock price on the market after a long decline period, following another decline.


(Culled from EquityScholar)



Frawzey

Quiet-period (in terms of an IPO): This is the period where an issuer is subject to a SEC ban on promotional publicity. The quiet period usually lasts either 40 or 90 days from the IPO.



(Culled from EquityScholar)



Frawzey