Spooky Stock Market: 7 Creepy Investing Terms, Explained
For those new to the investing world, some of the terms and phrases you come across can seem jargony, dry, and—well, let’s just call it like it is—a bit boring. We take on these terms in our Investor Jargon series, where we help break down concepts like dividends, proxy voting, and preferred stock, among others.
Today, we’re sharing a special themed investor jargon post that celebrates some of the strangest, spookiest bits of jargon. After all, ‘tis the season! Enjoy.
Have you ever seen a cockroach in your apartment and immediately felt a sense of dread, because, while you hoped it was just a fluke and there was just the one cockroach creeping around, you knew in your soul of souls you likely had a larger buggy problem? Well, the cockroach theory is named for that idea. (But in an investing context, of course.)
The cockroach theory suggests that if a company shares even just one piece of bad news with the public—such as an earnings miss or something unpleasant about their culture, for example—more negative news is likely about to creep its way out.
While it’s largely a psychological phenomenon, it can have effects on the market as a whole—not just the company in question. As you might expect, when investors get bad news about a company, they might reconsider their ownership in that company. In some cases, the news (and potential for more negative fallout) might be perceived as so bad that it also causes investors to rethink their ownership in that company’s industry in general, which can cause stock prices across entire sectors to plummet.
Dead cat bounce
The dead cat bounce gets its name from the truly morbid idea that even a dead cat will bounce if it falls far or fast enough. Dark. (This was the creepy term that inspired this blog post.)
But what is a dead cat bounce? It’s a short-lived rise in a security’s price during what’s otherwise an ongoing trend downwards. At first, the price increase might seem like a reversal of the security’s downtrend—like it’s recovering. But a true dead cat bounce is only temporary and is quickly followed by an even lower price than before the short-term recovery.
Dead cat bounces are not uncommon; long-term downtrends often experience brief blips where the prices temporarily rise.
Disappointingly, garbatrage has nothing to do with garbage, trash, dumpsters, or anything of that sort. Also called rumortrage, it’s when stock prices, and buying and selling activity increase in an entire industry because of one high-profile acquisition or merger. It’s a psychological thing—when one big takeover happens, many assume it’s just the tip of the iceberg, and there are likely more mergers or acquisitions to come in that industry.
Rumortrage is probably a more apt name, since, you know, it’s based on rumors, but garbatrage also makes sense if you consider that any price or trading activity is only changing because of potentially false (or garbage?) sentiment, rather than underlying facts.
Green shoes aren’t just choice footwear for witches and the sartorially-inclined. They’re also a way to keep a stock’s price stable during an initial public offering. Well, not green shoes, but the greenshoe option, anyway.
When companies go public, they work with underwriters who draft up underwriting agreements (more on this in our IPO post). Sometimes, they’ll include the greenshoe option, which allows them to sell up to 15% more shares during the offering, at their discretion.
Here’s how it can work: if an IPO is a huge success and the stock price starts to soar, underwriters can go back to the company and tell them to issue more shares (up to 15%) in order to meet the demand. This is, of course, in the underwriters’ best interest, since they get paid a percentage of the IPO.
The name, unfortunately, doesn’t stipulate everyone involved wear green shoes. Instead, it comes from the first company to add the clause to an underwriting agreement: Green Shoe Manufacturing Company.
A poison pill (aka a shareholder rights plan) is a tactic a company’s board of directors uses to discourage hostile acquisitions by other companies.
There are several types of poison pills, all of which are aimed at making a takeover less desirable. They do this by making it more difficult or expensive for the acquiring company, or by providing current shareholders with more power.
For example, a flip in poison pill gives shareholders—except for the company taking over—the option to purchase more shares of the company’s stock at a discount. This can be great for the shareholder because they have the opportunity to own more at a lower rate. But it’s not super great for the acquirer, because it dilutes their shares (and thus their voting power and potential value), potentially making the takeover more difficult and more expensive.
The name poison pill likely comes from war and espionage, when spies would carry—well—actual pills of poison to take if they were caught. So too might a company swallow one during an unwelcome acquisition? (Never say this industry doesn’t know how to bring the drama.)
Puking & the puke point
Don’t worry—investing (hopefully) won’t result in you expelling any bodily fluids. But that doesn’t mean you won’t hear about puking, which is investor slang for selling a stock as its price is plummeting. Why’s it called that? Because you’re purging it.
To go with puking is the puke point, which is the moment when, as an investor, you can no longer stomach the losses, so you decide to sell even though the price is rapidly falling.
A red herring (aka a preliminary prospectus) is a document a company files with the Securities and Exchange Commission (SEC) in the process of going public (more on that in our IPO post). It lists out all of the important info about the company’s operations.
It’s called a red herring because of the bold red disclaimer that sits on the cover page telling readers that it’s not yet effective and the info is subject to change. While, admittedly, there’s nothing inherently spooky about this at first glance, it is a little unsettling that such an important document (containing such key information) shares a name with a literary tool used to distract and mislead readers.
There you have it, our first ever thematic round-up of Investor Jargon. Even if you can’t keep a straight face while you read them, knowing what these terms mean can help you be a more educated investor—or even just give you great conversation fodder for your Halloween parties.